The RBI has reduced the key policy rate or the repo rate by 25 Basis Points (bps) to 6% in its third monetary policy review on Wednesday, as retail inflation softened. The RBI is expected to cut repo rates by 25 basis points which could make way for cheaper loans. "If states choose to implement salary and allowance increases similar to the Centre in the current financial year, headline inflation could rise by an additional estimated 100 basis points above the baseline over 18-24 months", the policy statement said.
The RBI is also expected to trim the reverse repo rate by an equal measure to 5.75 percent.
The industry in general and the Union Ministry of Finance had been critical of RBI for not cutting the repo rate in its last two monetary policies.
Under the earlier base rate regime (for borrowers before April 2016), changes in lending rates happened slowly, making it hard for lenders to transmit RBI's rate cuts.
Industry chamber Assocham on Sunday urged the apex bank to cut interest rates in view of the latest macro data. On their part, the government and the Reserve Bank are working in close coordination to resolve large stressed corporate borrowers and recapitalise public sector banks within the fiscal deficit target. "This should also give the required boost to the Realty sector, especially in the affordable housing market.", said Abhimanyu Londhe, CEO, SMC IM+ Realty Fund. "Given our expectation of both growth and inflation rising over the next six to 12 months, we expect a prolonged pause from the RBI", Nomura said. In fact the path of inflation was below the projection made in June.
Going forward, as base effects fade, the inflation momentum is to be hinged upon the impact of house rent allowance (HRA) under the Central Pay Commission (7th CPC), price revisions withheld ahead of the Goods and Services (GST) rollout as well as disentangling of structural and transitory factors shaping food inflation, the apex bank said. "Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap".
New Delhi, Aug 3 The finance ministry today said the RBI's decision to cut key policy rate by 0.25 per cent is an important step to achieve sustained growth consistent with moderate inflation and India's potential.
Forty of 56 economists polled by Reuters predicted the RBI would cut the repo rate by 25 bps - its first rate cut since one of the same size in October and the first easing move by a central bank in Asia since New Zealand in December.