RBI Governor announces repo rate cut in India

In a surprising announcement, current RBI Governor Urjit Patel informed the country about RBI’s decision of slashing the repo rates.

The RBI rate cut finds the Indian Rupee in a dynamic position

The announcement for a rate cut came as the first policy statement made by Urjit Patel since he took the position of the Governor of the Reserve Bank of India (RBI), as well as for the six-member monetary policy committee (MPC) that was involved in making this policy. The new regime in RBI, where the appointed MPC, constituting of three government-appointed economists and two RBI officials, joined Patel in the vote that resulted in favour of reducing the repo rates. The MPC voted unanimously to bring down the rate to 6.25 pc, the lowest in the past six years. The reduced repo rate means that RBI will now lend to banks at lower rates.

The stance taken under Patel is in stark contrast to the policies adopted by the RBI under Raghuram Rajan, who Patel succeeded at helm recently. Rajan has been hailed for applying policies in accordance with inflation rates as opposed to government pressure to ensure rate cuts. Patel had formerly played an important role in putting forward Rajan’s campaign targeted at securing an inflation-rate, which has been among the greatest changes that came to the RBI’s history of governance.

Reducing the inflation rate in India to 5 pc was set as a target to be achieved in the next 5 years, opposed to earlier targets of accomplishing the same by 2018, thereby softening the previous stance of RBI. In a short, 15-minute public communication, Patel also mentioned that   cooling food prices and weak global demand  were important factors behind the rate cut.

Consequences

This decision by RBI drew mixed reactions, with few observers welcoming the decision whereas others believed that it can have potentially harmful consequences.

The former Finance Minister, P. Chidambaram, took to Twitter to express his views on the move.

Welcome RBI decision to cut rate. Hope this will stimulate Capital Investment that has been sluggish for months.

— P. Chidambaram (@PChidambaram_IN) October 4, 2016

It was also noted by some analysts that since January 2015, the RBI has cut repo rates by 1.75 pc points, from 8 pc to 6.25 pc currently. Reportedly, banks have slashed rates by only 0.5 pc until now. As far as borrowing rates for homes and other loans are concerned, there hasn’t been any significant shift in policy. Hence, the practical impact and consequence of the rate cut remains to be seen.