Citing the reason that the inflation rate is coming down below eight percent as targeted this month and expecting it to reach below six percent by January 2016, the Reserve Bank of India (RBI) has relented on its stance and reduced the repo rate by 25 basis points, much to cheer the India Inc which was lobbying for the move for over two years.
Announcing the rate cut just before Sankranti, RBI Governor Raghuram. G. Rajan said on Thursday: “In its public interactions, the RBI had committed to initiate the process of monetary easing as soon as data indicated that medium term inflationary targets would be met.”
He said with this commitment in mind, it has been decided to reduce the policy repo rate or the rate at which RBI lends to commercial banks under the liquidity adjustment facility (LAF) by 25 basis points from 8% percent to 7.75% with immediate effect.
Rajan also said the RBI has decided to keep the cash reserve ratio (CRR) of scheduled banks unchanged at four percent of net demand and time liabilities (NDTL). The RBI would continue to provide liquidity under overnight repos at 0.25 percent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 percent of NDTL of the banking system through auctions, and continue with daily variable rate repos and reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.75 percent, and the marginal standing facility (MSF) rate and the Bank Rate to 8.75 percent with immediate effect, he said.
Rajan was at pains to explain that the immediate cause was lower than expected inflation due to the sharper than expected decline in prices of vegetables and fruits since September, ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil.
“Crude prices, barring geo-political shocks, are expected to remain low over the year. Weak demand conditions have also moderated inflation excluding food and fuel, especially in the reading for December. Finally, the government has reiterated its commitment to adhering to its fiscal deficit target,” Rajan said.
Households’ inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009.
The rate cut will motivate banks to lower lending rates and many banks have already cut their deposit interest rates on advice from the RBI. Secondly, the current rate cut brings cheer to both the new government and the industry and business community to take a break from the impact of the prolonged slowdown of the economy.
Now that the rate cut is down, the Union Budget to be presented by Finance Minister Arun Jaitley will reflect more incentives for the business community.
(With inputs from IANS)