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RBI repo rate cut will perk up market sentiments, say bankers

03 August 2017

In its last credit and monetary policy review in June, RBI had kept the repo rate unchanged at 6.25 per cent.

"The MPC remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis", the central bank said in its 3rd bi-monthly monetary policy statement, 2017-18.

The RBI Governor headed, six member Monetary Policy Committee also chose to keep the policy stance neutral in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4 per cent.

The government has taken note of the statement of the Monetary Policy Committee (MPC) and its assessment of the inflation and growth outlook, he added. According to HDFC Bank MD Aditya Puri, there is always a case for rate cuts. It might lead to banks reduce their lending rates, thereby, giving an impetus to credit growth, which has been down compared to past year.

Finance Minister Arun Jaitley called for a reduction in the key policy rate in June after retail inflation fell sharply from 2.18 percent to 1.54 percent - the lowest since the government started tracking it in its current form in 2012.

Patel said low inflation and the successful rollout of the national goods and services tax on July 1 helped steer the decision.

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While banks have cut the MCLR sharply (by about one percentage point) they have only tinkered with the base rate, reducing it by just 10-30 basis points over the past year.

The MPC has chose to keep the policy stance neutral and to watch incoming data with a view to keeping headline inflation close to 4 per cent.

The RBI also cut the reverse repo rate by 25 bps to 5.75 percent.

RBI's deputy governor Viral Acharya said that the RBI will be setting up an internal study group to study the Marginal Cost of Funds (MCLR) to see if banks' lending rates can be integrated directly to market rates to improve monetary policy transmission.

Inflation rates have slowed to record lows and food prices have been falling. "The commentary of RBI, if it decides to change its long-term stance is very crucial for the rate cuts to be on the longer end", he said. The case for rate-cut is additionally strengthened by easing of food inflation to (minus) 2.12 per cent from 0.31 per cent. A reduction in Repo rate today, happening after October 2016, will push the banks to further reduce the lending rates. Also the rollout of the GST has been smooth and the monsoon normal.

RBI repo rate cut will perk up market sentiments, say bankers