Reserve Bank's New Chief Delivers Surprise Rate Cut

Dwayne Harmon
February 8, 2019

Besides cutting rates, the governor also made it easier for banks to lend to top-rated finance companies.

The Monetary Policy Committee's unanimous decision to shift the policy stance from calibrated tightening to neutral is entirely welcome.

The ruling Bharatiya Janata Party (BJP) is already in an election mode.

The central bank also changed its monetary policy stance - a key signalling indicator to the markets -to "neutral" from "calibrated tightening".

"Investment activity is recovering but supported mainly by public spending on infrastructure". This is the first time in 17 months that the central bank has cut the rate.

Explaining the rationale for the rate cut, Das said it was "vital to act decisively and in a timely manner to address the objective of growth once price stability as defined (in RBI's inflation-targeting mandate) is achieved".

The Central Statistics Office (CSO) in the data released had pegged the growth rates of agricultural, forestry, fishing and mining industry at 5%, of manufacturing, electricity, gas, water supply and other utility services at 6% and the services sector at 8.1% as against the growth estimates of 6.8%, 7.5% and 8.4% of the respective sector. The global investment bank expects H1FY20 inflation at 3.8 percent compared to RBI's forecast of 3.3 percent. The RBI has forecast inflation to be in the range of 3.2-3.4 per cent in April-September 2019, lower than its earlier prediction of 3.8-4.2%.

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The MPC meeting - the first for Das as governor - was closely watched after tension between the RBI and the government prompted his predecessor Urjit Patel to abruptly quit in December, amid government demands to relax lending curbs and hand over surplus reserves.

The six-member monetary policy committee, headed by RBI Governor Shaktikanta Das, changed the policy stance to "neutral" from "calibrated tightening".

Nomura is of the view that RBI's new growth forecasts are too optimistic.

The Reserve Bank of India (RBI) Governor Shaktikanta Das arrives to attend a news conference after a monetary policy review in Mumbai, February 7, 2019. "Both recent history and forward guidance make a compelling case for the rate cut".

The RBI policy is a very dovish one and signals further rate cuts.

The NSE Nifty initially slipped but closee up 0.06 percent at 11,069.40 while the 10-year benchmark government bond yield fell to 7.51 percent from Wednesday's close of 7.56 percent.

The Indian rupee weakened to 71.69 to the dollar immediately after the announced but strengthened soon after to 71.42.

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