Monetary Policy: RBI cuts key policy rate to 6.25%

Home auto loans set to be cheaper as RBI Governor Shaktikanta Das cuts interest rates by 0.25

Monetary Policy: RBI cuts key policy rate to 6.25%

The inflation rate is estimated at 3.2-3.4% in the first half of the year 2019-20 and 3.9 % in the third quarter of 2019-20, said RBI Governor Shaktikanta Das.

The MPC also made a decision to change the monetary policy stance from calibrated tightening to neutral.

The MPC meeting - the first for Das as governor - was closely watched after tension between the RBI and the government prompted his predecessor Urjit Patel to abruptly quit in December, amid government demands to relax lending curbs and hand over surplus reserves.

Commenting on the RBI rate cut, Ankur Dhawan- Chief Investment, said "Industry was expecting a bigger rate cut than announced".

RBI Governor Shaktikanta Das cut the interest rate by 0.25 percent to 6.25 percent, a move that will lead to reduction of lending rate by banks leading to lower EMI for housing, auto loan and corporate borrowers. Markets also surged on across-the-board buying amid expectations of shift in RBI's policy stance and rate cut.

RBI's Monetary Policy Committee (MPC), the designated inflation nutter, also changed its stance to neutral allowing itself more headroom to either hike or cut rates in the near future. "It also signals a commitment to a symmetric policy to achieve its 4 per cent inflation target - a departure from the RBI's previous one-sided, conservative stance that aimed to keep inflation below the target."- Abhishek Gupta, Bloomberg Economics.

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India's retail inflation fell to a 18-month low of 2.19 per cent in December.

The cut came nearly a week after Modi's administration unveiled an expansionary budget, which included $13 billion of help for consumers ahead of the poll that's due by May, and days after an adviser to the prime minister said the RBI should ease policy.

Justifying its decision to cut rates, the MPC said headline inflation is projected to remain soft in the near term "reflecting the current low level of inflation and the benign food inflation outlook".

"Das has delivered what the Modi government was hoping for", said Mark Williams, chief Asia economist at Capital Economics London. Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Shaktikanta Das and three others voted for a cut in interest rates. That scenario may change now because the new governor has his priorities on growth very clear and may not tolerate the idea of banks ignoring the RBI cues. "Both recent history and forward guidance make a compelling case for the rate cut".

The rupee weakened to 71.69 to the dollar immediately after the announced but strengthened soon after to 71.42.

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