Bikky Khosla | 12 Feb, 2019
The Reserve Bank of India (RBI) last week cut its
policy rate by 25 basis points from 6.5 percent to 6.25 percent. It also changed its policy
stance back to "neutral"
from "calibrated tightening".
While the Monetary Policy Committee voted unanimously in favour of changing the
stance, the rate cut decision was voted against by two of the six members of
the committee. Most economists and market watchers did not expect a rate cut as
support of the monetary easing, RBI noted that retail inflation, measured by
y-o-y change in the CPI, declined from 3.4 percent in October to 2.2 percent in
December. With regards to economic growth, it pointed out to the Central
Statistics Office's GDP growth estimate of 7.2 percent for 2018-19. Besides
these two factors, nervousness in the non-banking financial companies is
probably another major issue that the central bank took into account while
going for the unexpected rate cut.
doubt, the central bank's arguments hold water. While some critics have termed
the monetary easing as a continuation of the government's election strategy, the
fact cannot be denied that at a time when inflation is downward significantly,
the shift of focus to growth is definitely welcome. The rate cut decision,
along with relaxation of lending norms for well-rated NBFCs and lifting of lending
curbs on three public sector banks, will help increase flow of funds to the
bodies have welcomed the rate cut with open arms. We believe that the cut of 25
basis points will be followed up with more such measures in the subsequent
months, said FICCI. In a similar tone, exporter's association FIEO has viewed that the lowering
of the Repo rate -- at a time when flow of credit to the MSME sector of exports
is at its lowest -- will help banks across the country bring down their lending
rate for the businesses, giving boost both to manufacturing and exports.
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