RBI brings cheers to industry, middle class with 25 basis points cut in repo rate

The biggest factor for the RBI while considering a revision of rates is whether a cut would benefit customers; the monetary policy committee of the central bank believes now it would

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New Delhi: The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) has cut policy rates by 25 basis points (0.25%) during the first bi-monthly monetary review of the financial year 2019-20. Now the repo rate has decreased from 6.25% to 6%.

Analysts believed that due to the fall in inflation, RBI could get an opportunity to consider the concern related to the development of the economy. The repeated economic data such as the sale of cars, PMI and IIP data have shown signs of slowing economic activity.

After achieving a high growth rate of 7.3% in July 2018, the core sector growth rate has been steadily falling — although some industries in the core sector have performed very well recently.

The MPC had changed the trend of monetary policy in its review made in February by turning it ‘negligent’ to ‘neutral’. Economists believe that this was a sign of a cut in policy rates this time.

RBI meets expectation

Firm India Ratings had said that, according to the level of growth and inflation at the present time, RBI had the scope of cutting policy rates by 0.25%, which is exactly what has happened. The rating agency had expressed the hope that the RBI monetary policy would change the trend from ‘neutral’ to ‘liberal’ — an expectation that was met.

During the monetary policy review, economists and analysts look at these four issues.

Cash position

The biggest factor is whether the policy rate cut would benefit customers. The cash crisis following the demonetisation of 8 November – 31 December 2016 improved after October 2018, but the situation is still far from normal.

Edelweiss Securities says regarding the cash that, in the current situation, the rate of reduction in rates by the RBI will take time to reach the customers.

Monsoon and inflation

The RBI keeps monitors inflationary tendencies in the market. The Indian Meteorological Department (IMD) has predicted a negative impact on June-September south-west monsoon season due to the effect of El Niño. This monsoon is likely to cause 70% rainfall in the country. At the same time, inflation has been consistently low for the seventh month, with the RBI target of 4%. It is expected to be at an average of 4% for the entire fiscal.

But core inflation is close to 5.5%. In such a situation, the rate cut will depend on how the RBI estimates inflationary expenditure.

Global effect

Foreign investors pulled out huge amounts of money from India between April 2018 and October 2018. However, now things have changed and foreign investment is flowing into the country again.

However, according to the DIPP, FDI equity infusion has dropped to 7%. Market watchers will watch how the RBI deals with the sluggishness of FDI.

Growth rate decline

In its December policy, the RBI had projected a growth rate for the fiscal year 2018-19 to be 7.4% while the CSO increased the growth rate of 2018-19 to from 6.7% to 7.2% in FY 2017-18, given the better performance of the manufacturing and agricultural sector.