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RBI cuts repo rate by 25 basis points before festive season begins

Neeraj Thakur | Updated on: 10 February 2017, 1:46 IST

Call it a Diwali bonanza to the industry: the newly formed Monetary Policy Committee (MPC) cut the repo rate by 25 basis points (bp) to 6.25% in its first ever monetary policy review. Repo rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks.

The reduction comes after Union Finance Minister Arun Jaitley recently said the newly formed committee would keep in mind the low inflation in the country while taking a call.

"The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 percent by Q4 of 2016-17 and the medium-term target of 4 percent within a band of +/- 2 percent", according to a statement by the committee.

A low interest rate regime is important for the country's manufacturing sector, still posting muted growth.

The manufacturing sector growth moderated in September as pace of new orders and production fell (as per the Nikkei Markit India Manufacturing Purchasing Managers' Index PMI) to 52.1 in September from 52.6 in August. The PMI index is a gauge of manufacturing performance that indicates the growth in the sector.

MPC decision backed by good monsoon

The decision to reduce the repo rate by the MPC was taken on the backdrop of a good moonsoon this year.

"the outlook for agricultural activity has brightened considerably. The south west monsoon ended the season with a cumulative deficit of only 3% below the long period average, with 85% of the country's geographical area having received normal to excess precipitation. Kharif sowing has surpassed last year's acreage, barring cotton, sugarcane and jute and mesta," according to the MPC statement.

Will your EMI come down?

October is the biggest month for the industry in India. A sizeable part of the population tends to purchase their expensive items on the occasion of Diwali, which this year falls on 31 October.

According to the new RBI guidelines, all loans with moving interest rates, taken after April 1, 2016, are linked to the bank's marginal cost of funds-based lending rate (MCLR), while those period are linked to the bank's base rate.

The MCLR is effected by every change in the repo rate. This means that banks would have a room and reason to announce a cut in their lending rates.

Out of the four bi-monthly monetary policy reviews this financial year so far, RBI has cut the repo rate by 75 basis points from 6.75% to 6.25%.

Impact on industry

After Tuesday's announcement, banking storcks mostly rose. SBI was up 0.9%, ICICI Bank gained a handsome 1.07% and HDFC Bank inched up 0.11%.

On Monday, the stock markets gained ground on the back of rate-sensitive sectors such as banking and automobiles.

The rate of inflation as per the Consumer Price Index was a little above 5%, in August.

All six MPC members were unanimous about the decision to cut the repo rate. Of them, three are from outside RBI:

  • Chetan Ghate: head, economics and planning unit at Indian Statistical Institute, New Delhi
  • Pami Dua: director, Delhi School of Economics
  • Ravindra Dholakia: professor, Indian Institute of Management, Ahmedabad.

The others were RBI governor Urjit Patel, deputy governor R Gandhi and executive director Michael Patra.

First published: 4 October 2016, 3:11 IST
Neeraj Thakur @neerajthakur2

As a financial journalist, his interface with the two dominant 'isms'- Marxism and Capitalism- has made him realise that an ideal economic order of the world would lie somewhere between the two.

Senior Assistant Editor at Catch, Neeraj writes on everything related to business and the economy.

He has been associated with Businessworld, DNA and Business Standard in the past.

When not thinking about stories, he is busy playing with his pet dog, watching old Hindi movies or searching through the Vividh Bharti station on his Philips radio transistor.