RBI Monetary Policy: Repo rate cut by 25 basis points to 6.25%, stance changed to neutral

4-2 voted in favour of a rate cut. Shaktikanta Das, Ravindra Dholakia, Pami Dua, Michael Patra voted in favour of rate cut while Chetan Ghate and Viral Acharya voted to keep the policy rate unchanged.

“Over the past two and a half days, that is during February 5, February 6 and February 7, the Monetary Policy committee (MPC) reviewed the macroeconomic and financial conditions and prospects and voted by a 4:2 majority to reduce the policy repo rate by 25 basis points (bps). The MPC also voted unanimously to shift the policy stance from calibrated tightening to neutral,” said Das.

The repo rate is the rate at which the central bank of the country lends funds to the commercial banks. The commercial banks borrow funds only if they witness a shortfall in their funds. The monetary policy committee of a country uses the reverse repo rate as a tool to control the money supply in the country.

The top bank also adjusted the Marginal Standing Facility (MSF) rate to 6.5 percent. MSF is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities.

The reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6.0 percent, and the Bank Rate to 6.5 percent. LAF is a tool used in monetary policy which allows banks to borrow money through repurchase agreements. Bank rate, on the other hand, is the rate when banks want to borrow long term funds from RBI.

The top bank projected the FY20 GDP growth at 7.4 percent, with risks evenly balanced. The RBI also withdrew the 20 percent cap on FPI exposures to single Indian company debt.

This is the first policy announcement under the new RBI governor Shaktikanta Das, coming less than a week after the interim Budget.

The three-day meeting of the Monetary Policy Committee (MPC) began on February 5.

The RBI projected the CPI at 2.8 percent for the January-March period and 3.2-3.4 percent for the April-September quarter.

Experts, before the outcome of the meeting, said the latest inflation numbers formed the basis of the argument for a rate cut. The retail inflation had plunged to an 18-month low in December 2018 at 2.19 percent.

Apart from the policy announcements, the RBI has proposed to allow resolution applicants under the Insolvency and Bankruptcy Code to borrow funds abroad in order to repay the existing lenders.