RBI cuts repo rate by 25 bps to 6% as industry slackens

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) today announced a 25 basis point reduction in its policy short-term interest rate to 6 per cent, from the existing 6.25 per cent.

This, it said, has been done on the basis of an assessment of the current and evolving macroeconomic situation, RBI said.

At the end of its two-day meeting, the Monetary Policy Committee decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.25 per cent to 6.0 per cent with immediate effect, RBI stated in a release.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25 per cent, RBI said.

The decision of the MPC is in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation rate of 4 per cent within a band of +/- 2 per cent, while supporting growth, it added.

Consumer price inflation in June based in the consumer price index plunged to its lowest at (-) 1.54 per cent, mainly due to favourable base effects.

Industrial performance has weakened in April-May 2017, mainly reflecting a broad-based loss of speed in manufacturing. Excess inventories of coal and near stagnant output of crude oil and refinery products combined with deficiency in demand for electricity tended to slow down industrial activity, RBI noted.

There was a contraction in demand for consumer durables – indicative of still sluggish urban demand – and in capital goods, pointing to deceleration in capital formation.

While a modest firming up of global demand and stable commodity prices supported global trade volumes, RBI noted that merchandise export growth weakened in May and June from the April peak as the value of shipments across commodity groups either slowed or declined.

By contrast, import growth remained in double digits, primarily due to a surge in oil imports and stockpiling of gold imports ahead of the implementation of the GST. Imports of coal, electronic goods, pearls and precious stones, vegetable oils and machinery also accelerated.

As import growth continued to outpace export growth, the trade deficit at $40.1 billion in Q1 was more than double its level a year ago.

RBI noted that despite the demonetisation drive surplus liquidity conditions persisted in the system, exacerbated by front-loading of budgetary spending by the government.

There was also some moderation in the pace of increase in currency in circulation (CiC) which is typical at this time of the year – as against the increase of Rs1,500,000 crore during the first two months of 2017-18, it was Rs43,600 crore and Rs9,500 crore during June and July, respectively.

RBI expects domestic economy to keep up the growth momentum with a normal and well-distributed south-west monsoon for the second consecutive year brightening the prospects of agricultural and allied activities and rural demand.