India unexpectedly cuts key rate to boost slowing economy

Good news is here RBI rate cut to bring down home loan EMI

India's rate cut continues a trend in which some major central banks, anxious about slowing global growth and helped by low inflation, have moved firmly away from the tightening moves made a year ago.

The Reserve Bank of India's (RBI) surprise decision to cut interest rates for the first time in 18 months on Thursday is a pre-election stimulus gift from a compliant central bank for Prime Minister Narendra Modi.

RBI Governor Shaktikanta Das cut the interest rate by 0.25 percent to 6.25 percent, a move that will lead to reduction of lending rate by banks leading to lower EMI for housing, auto loan and corporate borrowers. This was the first MPC meeting chaired by new RBI Governor Shaktikanta Das.

On the growth front, which the RBI has pencilled in a 7.4 per cent uptick, Das said progress of the monsoons, crude prices and external situation, including the fate of Brexit and trade wars, are the things to watch out for.

The RBI also announced a string of regulatory changes including raising the limit of collateral free bank loans for farmers to Rs 1.6 lakh from Rs 1 lakh now, among others. Past three governors have been blaming the banks for not passing on their rate cuts to customers, thus offsetting the efforts of the monetary authority to lower interest cost for the economy.

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"The rate cut is unlikely to give a major fillip to investments as capacity utilisation still remains low in the manufacturing sector", said Devendra Kumar Pant, chief economist, India Ratings & Research, the arm of rating agency Fitch. This is the first policy statement issued by the RBI under its newly appointed governor Shaktikanta Das. There is a need to strengthen private investment activity and buttress private consumption.

"Looking beyond the current year, the growth outlook is likely to be influenced by. aggregate bank credit; and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based", the MPC said.

The committee though flagged external headwinds including trade tensions, and crude oil prices, which though appear well-behaved now. Oil prices and the lagged impact of the recent depreciation of the Indian rupee could be a drag on net exports while slowing global demand could pose headwinds.

Thus headline inflation for the entire forecast horizon of MPC is expected to be below the lower end of the target range at four percent. "Growth in rural wages moderated in October", RBI said.

The MPC also chose to change the monetary policy stance from calibrated tightening to neutral.

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