March 22, 2018

RBI makes first rate cut of 2017

03 August 2017, 09:30 | Virginia Santiago

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The repo rate - the rate at which the central bank lends to commercial banks - now stands at 6.0 percent - a 6½ year low - from a 6.25 percent earlier.

Thus, RBI has constituted internal study group to study the various aspects of the MCLR system from the perspective of improving the monetary transmission and exploring linking of the bank lending rates directly to market determined benchmarks.

Meanwhile, the RBI has constituted an internal group to study the marginal cost of lending rate (MCLR) system for commercial banks created to improve monetary policy transmission, RBI Deputy Governor Viral Acharya said on Wednesday.

Further, there has been a sharp fall in "services" inflation over the a year ago or so with significant contribution from house rents, tuition fees, mobile charges, etc. Most banks will cut their deposit rates and also their lending rates. This cut down on central bank money lending rate is 6 per cent from 6.25 per cent. Chandrajit Banerjee, Director General, CII said, "CII feels that a steeper cut in interest rate would have been more in consonance with market realities". The repo rate slash shall make the loans cheaper for the consumers.

"The trajectory of inflation in the baseline projection is expected to rise from current lows", Patel said. "Premature action at this stage risks disruptive policy reversals later and the loss of credibility." he said.

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According to NDTV, "Weak consumer spending as well as lower food prices have kept inflation below the RBI's mid-term target of 4 per cent for the past eight months".

RBI believes that from here on, retail inflation has only one direction: upwards.

Inflation in Asia's third largest economy has missed forecasts for the last six to seven months, noted DBS economist Radhika Rao. The arguments for the cut were much as expected: (1) lower inflationary pressures with easing food prices, (2) lower core (headline inflation excluding food and fuel products) inflation, and (3) smooth roll out of GST. India's Economic Affairs Secretary Subhash Chandra Garg called the rate cut an "important step" to ensure sustained growth for stable, moderate inflation.

"Many people in the advanced economies are saying we should have been at 4 per cent (inflation rate), and not be at 2 per cent, which was a mistake".

"Fair number of pieces of the jigsaw are already in place", he added.

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