Rajan relents, cuts repo rate by 0.25 percentage points

The Reserve Bank of India (RBI) today announced a 0.25 percentage point reduction in its key repo rate to 7.25 per cent from 7.50 per cent with immediate effect. The reduction is on expected lines and RBI said the decision has been taken on the basis of an assessment of the current and evolving macroeconomic situation.

Announcing the second bi-monthly monetary policy statement for 2015-16, RBI said, along with the reduction in the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points.

Consequently, RBI said, the reverse repo rate under the LAF stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.25 per cent.

RBI said it would continue to provide liquidity under overnight repos at 0.25 per cent of the net demand and time liabilities (NDTL) of banks under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auction.

RBI said it would continue with its overnight / term variable rate repos and reverse repos to smoothen liquidity.

The central bank, however, kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of banks' net demand and time liabilities (NDTL).

RBI noted that banks have of late started passing through some of the past rate cuts into their lending rates.

Headline inflation has evolved along the projected path and the impact of unseasonal rains has been moderate so far and administered price increases remain muted.

The pushing back of the timing of normalisation of US monetary policy has given policymakers more leeway.

But, with low domestic capacity utilisation, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today, RBI stated.

However, RBI said, the risks to inflation identified in April still cloud the picture. With some unpredictability in the southwest monsoon, food production could still be hit.

Astute food management is needed to mitigate possible inflationary effects. This, combined with the firming up of crude prices, and geo-political risks could still impact inflation.

RBI noted that since its first bi-monthly monetary policy statement of 2015-16 issued in April 2015, incoming data suggest that the global recovery is still slow and getting increasingly differentiated across regions.

In the United States, the economy shrank in Q1 owing to harsh weather conditions, the strength of the US dollar weighing on exports and a decline in non-residential fixed investment. In the euro area, financial conditions have eased due to the European Central Bank's (ECB) quantitative easing and a depreciating euro.

The RBI has taken note of a moderation in the composite purchasing managers' indices (PMI), economic sentiment and consumer confidence in April.

On the global economic scenario, RBI said, while growth in Japan showed a surprising upside in Q1, supported by private demand as business spending boosted inventories and personal consumption, for emerging market economies (EMEs), macroeconomic conditions remained challenging due to domestic fragilities, exacerbated by bouts of financial market turbulence.

China's continuing deceleration in spite of monetary easing, the recent firming up of crude prices has reduced headwinds to growth for some energy exporters, while increasing them for importers, RBI noted. Even without a decisive economic recovery or adverse geopolitical shocks, oil prices appear to be volatile, it added.

Global currency markets continue to be dominated by the strength of the US dollar, with the G3 currencies reflecting the asynchronicity of their monetary policy stances.