Rajan plays Santa, cuts repo rate by 50 basis points to 6.75%

Reserve Bank of India, in its fourth bi-monthly monetary policy of the current fiscal, has cut the repo rate by 50 basis points to 6.75%, its lowest since May 2011. The cash reserve ratio (CRR), currently at 4 per cent, expectedly was kept the same.

Acceding to the growing voices for a rate cut from the Indian industry at large and perhaps exceeding their expectations, Reserve Bank of India, in its fourth bi-monthly monetary policy of the current fiscal, has cut the repo rate by 50  basis points to 6.75%, its lowest since May 2011. The cash reserve ratio (CRR), currently at 4 per cent, expectedly was kept the same.
 
The RBI said in its statement that since the third bi-monthly statement of August 2015, global growth has moderated, especially in emerging market economies (EMEs), global trade has deteriorated further and downside risks to growth have increased. In the United States, industrial production slowed as capital spending in the energy sector was cut back and exports contracted, weighed down by the strength of the US dollar. Consumer spending stayed buoyant, however, amidst steadily improving labour market conditions. In the Euro area, a fragile recovery strengthened, supported by domestic consumption, less slack in the labour market and improving financial conditions engendered by ultra-accommodative monetary policy.
 
Due to a consistent downtrend in the consumer inflation in the recent months, the conditions were right for the rate cut. The earlier monetary policy statement from RBI had reiterated that the interest rate trajectory will be influenced by inflationary scenario, transmission of policy action and exogenous variable of US Fed policy. India’s retail inflation for August slowed to 3.66%, when compared with the reading of 3.69% during the prior month. Earlier, the government reported that wholesale prices contracted for the tenth consecutive month. WPI inflation for August was reported at -4.95%.
 
A Reuters poll last week had majority of economists rooting for the rate cut. However, since the monsoons have not been kind and have fallen below their long-term average, a pause in expected in any further rate cut.