RBI May Change Stance To "Neutral" In Shaktikanta Das's First Review

RBI May Change Stance To

RBI May Change Stance To "Neutral" In Shaktikanta Das's First Review

Das will have an opportunity to lay out his monetary policy outlook at a press briefing scheduled for 12 p.m.in Mumbai, 15 minutes after the rate announcement.

The government is already in an election mode. In its budget on Feb 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing.

Shaktikanta Das, RBI Governor.

The Reserve Bank of India (RBI) on Thursday cut repo rate by 25 basis points (bps) to 6.25 per cent. However, it remains to be seen if the banks will quickly pass on the benefits of the rate cut to the borrowers. Most polled respondents expected the central bank to only change the stance, to neutral.

The last rate cut was announced in August 2017 and was followed by two hikes of 25 bps each past year.

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GDP growth for 2019-20 is projected at 7.4% - in the range of 7.2-7.4% in H1, and 7.5% in Q3 - with risks evenly balanced.

India's core inflation was pegged at around 5.7 percent in December. The pace has steadily dropped since June's 4.92 percent.

In its December policy statement, the RBI forecast headline inflation at 3.8 percent to 4.2 percent in the six months starting April, not very far from its medium-term target of 4 percent.

The central bank also projected an economic growth rate of 7.4% for the next fiscal year, up from 7.2% estimated for the current fiscal year by the Central Statistics Office (CSO).

Going ahead, the RBI said, the short-term outlook for food inflation appears particularly benign, despite adverse base effects.

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Indian shares pared gains while ten-year bond yields slid five basis points after the surprise rate cut.

Four of six members of the MPC voted to cut the rates, while all six voted for a change in the stance.

It marked the first interest rate decision under new bank chief Shaktikanta Das, an ally of Modi who was appointed in December after his predecessor, Urjit Patel, quit following a public spat with the administration over alleged government interference.

Patel's exit prompted some to fret the RBI's independence was under threat, but some economists argued that Thursday's decision should not be read as a surrender to pressure.

Even though at the RBI pressure, Das maintained that the decision on lending rates would be left to the banks and was quick to add that he would meet bank heads soon where issue of inadequate monetary transmission would be discussed. "Both recent history and forward guidance make a compelling case for the rate cut". The 25 bps rate cut has come after a period of one-and-a-half years (the last one was in August 2017).

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