Monetary policy review: RBI cuts repo rate by 25 bps

The Reserve Bank of India (RBI) has decided to cut its key policy rate, or the repo rate, by 25 bps to 6.25 per cent. New Governor Urjit Patel, who took over a month ago from Dr Raghuram Rajan, announced his first monetary policy this afternoon.

There was no change in the cash reserve ratio (CRR) or the amount of money parked with the central bank as a percentage of bank deposits at 4 per cent. The decision to cut was taken after a two-day deliberation by the newly formed Monetary Policy Committee. The committee has three external members and three internal members from the RBI including the Governor. All 6 members voted in favour of a cut.

The policy announcement comes just as the traditional busy season for bank credit begins. Consumption expenditure generally sees an uptick at this time with a number of festivals following in quick succession. Bank credit which has so far remained tepid growing at about 9 per cent is expected to see a pick up in the second half of the fiscal. Bankers say that as a rule of thumb, bank credit must grow at between 2 to 2.5 times the GDP growth rate which is expected to be around 7.5% per cent currently.

The RBI has cut its key policy rate by 150 basis points from 8 per cent in early 2015 to 6.50% at the start of the current fiscal in its April policy. Since then it has maintained status quo ignoring a rising clamour from industry to cut rates further. Banks have passed on only about half these cuts to customers. The repo policy rate is now at its lowest since November 2010.