The Reserve Bank of India (RBI), on February 7, 2019, cut the benchmark interest rate by 0.25 per cent to 6.25 per cent, on expectation of inflation staying within its target range, in a move that may translate into lower monthly installments for home loan and other loans. The central bank also changed its monetary policy stance to ‘neutral’ from the earlier ‘calibrated tightening’, signalling further softening on its approach towards interest rates.
In the first policy review under governor Shaktikanta Das, the six-member Monetary Policy Committee (MPC) voted 4:2 in favour of the rate cut, while the decision to change the policy stance was unanimous. Benchmark interest rate (repo rate) was cut by 0.25 per cent to 6.25 per cent, a move that would result in lower cost of borrowing for the banks that are expected to transmit the same to individuals and corporates. Accordingly, the reverse repo was reduced to six per cent from 6.25 per cent.
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The RBI cut its estimates on headline inflation – which cooled off to an 18-month low of 2.2 per cent in December 2018 – for the next year and expects the number to come at 2.8 per cent in the March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in third quarter of FY20. “Headline inflation is projected to remain soft in the near term, reflecting the current low level of inflation and the benign food inflation outlook,” the MPC resolution said, adding “We need to be watchful of vegetable prices, oil prices, trade tensions, health and education inflation, financial market volatility and monsoon outcomes.”
The rate cut is in consonance with achieving the medium-term objective of maintaining inflation at the four per cent level, while supporting growth, it said. Deputy governor Viral Acharya and another MPC member, Chetan Ghate, voted for a status quo in interest rates, while Das and three others voted for a cut in interest rates.
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