India's central bank cut the repo rate to a six-year low of 6.25 percent Tuesday, citing a good monsoon, in its first monetary policy decision under new governor Urjit Patel. The Reserve Bank of India said the benchmark repo rate - the level at which it lends to commercial banks - would be brought down by 25 basis points from 6.50 percent. It was last at 6.25 percent in November 2010.
"The outlook for agricultural activity has brightened considerably," the RBI said in a statement, adding that 85 percent of the country had received "normal to excess precipitation" during India's four-month-long monsoon.
Good monsoon rains are vital for Indian crops and a particularly dry season can reduce farm output, raising food prices which can be crippling for the tens of millions of India's poor.
The above average rains have brought relief to millions of rural farmers who were reeling from two years of drought, helping to push inflation down to a five-year low in August.
Tuesday's interest rate decision was the first to be made by a new Indian monetary policy committee, which was established last month, rather than the chief of the central bank. Previously the governor would decide whether to cut rates. Now they are set by a six-member committee, including Patel, two RBI executives, and three independent economists appointed by the government.
Patel enjoys a deciding vote in the event of a tie, but cannot veto or overrule the committee. The panel is similar to a committee in Britain that sets rates for the Bank of England. All six members of the monetary policy committee voted in favour of cutting rates to 6.25 percent, said the RBI statement.
India is the world's fastest-growing major economy but growth slowed sharply to 7.1 percent year-on-year in the first quarter of the 2016 to 2017 financial year. That was down from 7.9 percent recorded in the preceding quarter, according to statistics ministry figures announced in August.
The MPC, which was meeting for the first time, was introduced to make decision-making more transparent and more collegiate. Hitherto, the RBI governor had taken sole responsibility for deciding rates. Governor Patel, who was appointed last month, has a deciding vote if the panel is evenly split.
“The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index inflation at 5 percent by Q4 of 2016-17,” the RBI said in its statement.
The Sensex surged by over 159 points. The broader NSE index was up 0.3 percent, while the benchmark 10-year bond fell 3 basis points to 6.75 percent. The rupee extended gains to 66.40 per dollar from 66.47.
Source: Gulf News