The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has decided to reduce the key policy rate or the repo rate by 25 bps to 6.25% in the last bimonthly policy review of 2018-19 while changing the policy stance to 'neutral' from 'calibrated tightening'. The rate cut is in line with expectations as retail inflation grew by 2.2% in December, its slowest in the last 18 months.
While the decision to change the policy stance was unanimous, four out of six members voted for a rate cut while two opted for status quo. This was the first policy review under the new Governor Shaktikanta Das. While reducing the interest rate, the Central bank said headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook.
“Continuing deflation in food items, a sharp fall in fuel inflation and some edging down of inflation excluding food and fuel contributed to the decline in headline inflation,” the RBI said. Observing that actual inflation in the third quarter of 2018-19 was marginally lower than what was projected, the RBI said, “There have been downward revisions in inflation projections during the course of the year, reflecting mainly the unprecedented soft inflation recorded across food sub-groups.”
Going ahead, the RBI said, the short-term outlook for food inflation appears particularly benign, despite adverse base effects. The RBI has revised the projection for Consumer Price Index (CPI) inflation downward. “Taking into consideration these developments and assuming a normal monsoon in 2019, the path of CPI inflation is revised downwards to 2.8% in Q4:2018-19, 3.2-3.4% in H1:2019-20 and 3.9% in Q3:2019-20, with risks broadly balanced around the central trajectory,” it said. GDP growth for 2019-20 is projected at 7.4% - in the range of 7.2-7.4% in H1, and 7.5% in Q3 - with risks evenly balanced.
