Published: Fri, February 08, 2019
Finance | By Loren Pratt

RBI cuts repo rate in first policy review under new governor

RBI cuts repo rate in first policy review under new governor

In the sixth bi-monthly monetary policy review Thursday, RBI surprisingly reduced the repo rate by 0.25 per cent to 6.25 per cent. In a widely anticipated move, it also shifted its policy stance from "calibrated tightening" to "neutral", suggesting more cuts could be on the horizon.

The ruling Bharatiya Janata Party is already in election mode.

Thursday's cut is welcome news for Prime Minister Narendra Modi's government, which wants to boost lending and lift growth as it faces elections by May.

But it still wasn't enough, he said.

Financial markets have cut almost one full quarter point rate rise over the next two years since the last inflation report in November, factoring in just a 50/50 chance of one hike in 2019.

Alongside the report, the Bank's monetary policy committee today voted unanimously to keep rates unchanged.

Banks have been increasing lending rates since March 2018. Some of those issues worsened dramatically after the government suddenly banned the use of then existing high-denomination banknotes in 2016 and hastily introduced a new national sales tax in 2017. In its budget on February 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing.

The Bank of England cut its growth forecast for this year amid Brexit uncertainty. "Going by the guidance, there is room for a further rate cut".

Alongside the dire warnings about United Kingdom growth, the central bank's nine-member Monetary Policy Committee (MPC) voted unanimously to leave rates at 0.75%.

But the faster-than-expected move isn't likely to help the economy much, they said.

"Investment activity is recovering but supported mainly by public spending on infrastructure", the MPC said in a statement.

It could sow the seeds for inflation - especially when added to the fiscal stimulus in the budget - in the second half of the next financial year, which begins on April 1, he warned.

That was seen as somewhat hawkish a time when other major central banks have said they will hold off from raising borrowing costs.

The Bank added a bigger-than-expected slump in the global economy is also impacting United Kingdom growth.

Just moments after the latest rates decision, the Bank said: 'Since the Committee's previous meeting, key parts of the European Union withdrawal process had remained unresolved and uncertainty had intensified.

The BJP lost three key state elections to the opposition Congress late past year and national polls have indicated that Modi faces a tough re-election battle against a resurgent opposition as Congress and regional parties form alliances.

Economic growth fell to a worse-than-expected 7.1 percent in the July-September quarter from 8.2 percent in the previous one, due to slower consumer spending and farm growth.

But Mr Carney pointed towards uncertainties around Brexit in causing "short-term volatility" and a "series of tensions" in the economy and businesses.

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