The Reserve Bank of India's new Governor Urjit Patel unexpectedly took interest rates to lower levels on a unanimous vote as a good monsoon improved the outlook for the farm sector that is set to ease inflationary pressures further and quicken growth.
At the first meeting of the newly formed Monetary Policy Committee, members voted 6-0 to cut the benchmark lending rate, the repo, to 6.25 percent from 6.50 percent, the bank said in a statement Tuesday. Consequently, the reverse repo rate was adjusted to 5.75 percent.
Economists had widely expected Patel and the MPC to maintain status quo in their debut policy session.
The repo rate was previously lowered by a quarter-basis point in April. The central bank has cut the rates by a cumulative 175 basis points since 2015.
The bank said the decision taken by the MPC is consistent with an accommodative monetary policy stance.
At his final meeting as RBI Governor, Raghuram Rajan had kept the rates unchanged in August, but said the stance of monetary policy remained accommodative.
On the domestic front, the bank expects the momentum of growth to quicken with a normal monsoon raising agricultural growth and rural demand. Nonetheless, the continuing sluggishness in world trade was likely to further slacken the external demand going forward, the bank said.
The RBI maintained its growth outlook at 7.6 percent for 2016-17.
The MPC envisaged a trajectory taking headline CPI inflation towards a central tendency of 5 percent by March 2017, with risks tilted to the upside.
The committee expects food inflation to improve on the back of strong rise in sowing, along with supply management measures. The sharp drop in inflation reflects a downward shift in the momentum of food inflation.
The bank said the measures taken to cool food inflation pressures would help to moderate the momentum in food inflation in the months ahead. This has opened up stance for policy action.
In August, inflation had eased to 5.05 percent from 6.07 percent in July. In the medium-term, the bank aims to bring inflation to 4 percent with a price band of +/- 2 percent.
Shilan Shah at Capital Economics, observed a more dovish outlook for inflation compared to previous statements. The economist expects to see further modest, loosening over the coming months. But the scope for aggressive rate cuts is limited, he added.
by RTT Staff Writer
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