The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points (bps) to 6.0 per cent from 6.25 per cent with immediate effect. Consequently, the reverse repo rate stands adjusted to 5.75 per cent, and the MSF rate and the Bank Rate to 6.25 per cent.
The MPC took the decision on the basis of an assessment of the current and evolving macroeconomic situation. The first bi-monthly Monetary Policy Statement, 2019-20 said that the MPC also decided to maintain the neutral monetary policy stance. The latest decisions of the MPC “are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” an RBI statement said.
The Monetary Policy Statement listed several uncertainties that cloud the inflation outlook. First, with the domestic and global demand-supply balance of key food items expected to remain favourable, the short-term outlook for food inflation remains benign. However, early reports suggest some probability of El Niño effects in 2019. There is also the risk of an abrupt reversal in vegetable prices, especially during the summer months.
Second, inflation in fuel group items, particularly electricity, firewood and chips saw unprecedented softening in the second-half of 2018-19. There is, however, uncertainty about the sustainability of this softening in inflation in fuel items, the statement said.
Third, the outlook for oil prices continues to be hazy, both on the upside and the downside. On the one hand, continuing OPEC production cuts will reduce supplies. On the other hand, there is considerable uncertainty about demand conditions. Should there be a swift resolution of trade tensions, a pick-up in global demand is likely to push up oil prices. However, should trade tensions linger and demand conditions worsen, crude prices may fall from current levels, despite production cuts by OPEC.
Fourth, inflation excluding food and fuel has remained elevated over the past twelve months with some pick up in prices in February. However, should the recent slowdown in domestic economic activity accentuate, it may have a bearing on the outlook for inflation in this category. Fifth, financial markets remain volatile reflecting in part global growth and trade uncertainty, which may have an influence on the inflation outlook. Sixth, the fiscal situation at the general government level requires careful monitoring.
Hoping that the reduction of interest will pave way for the growth of investment and exports, Tirupur Exporters’ Association (TEA) President Raja M Shanmugham requested banks to pass on reduction of policy repo rate by RBI to exporting units.
“By taking into account of this (latest RBI decision), all banks will come forward to pass on the reduction of interest rate to the borrowing units, which is desperately required for the knitwear garment exporting units, particularly to MSME exporting units which are suffering further to macroeconomic changes,” Shanmugham said.