The Reserve Bank of India (RBI) last week cut interest rates, in line with what was expecting. Repo rate - the rate at the which the central bank lends short-term money to banks - was cut by 25 basis points to 6 per cent from 6.25 per cent. RBI's move comes on the back of inflation running well below its target for consecutive quarters. The central bank had last cut key rates in October 2016. The current rate of 6 per cent is the lowest since November 2010.
"There is scope for banks to reduce lending rates," RBI governor Urjit Patel said, in a cue to commercial banks to pass on the rate cut to consumers.
A significant moderation in retail inflation over the past three months had reinforced calls for further monetary policy easing from the RBI, which changed its stance to neutral from accommodative at the beginning of the year. The central bank said it would retain its neutral stance, warning it expected inflation to rise but pinning further moves on the economic data.
Weak consumer spending following the Narendra Modi-government's ban on high-value currency notes of Rs 500 and Rs 1,000 denomination late last year as well as lower food prices have kept inflation below the RBI's 4 per cent mid-term target for the past eight months. Inflation eased to its slowest pace in more than five years in June.
It was slumping inflation that allowed the RBI to provide a booster shot to India's economy which has been growing at its slowest pace in over two years. The quantum of cut was, however, not unanimous. Four members of RBI's monetary policy committee voted to cut rates by 25 basis points, one voted for a 50 basis points cut and one voted for leaving rates unchanged.
The RBI also cut reverse repo rate - the rate at which the central bank borrows money from commercial banks by 25 basis points to 5.75 per cent from 6 per cent. Marginal Standing Facility (MSF) rate - the rate at which banks borrow overnight funds from RBI against approved government securities - and the bank rate were also adjusted to 6.25 per cent.
After rate cut, the RBI is forecast to remain status quo in its policy at least until 2019 because economic growth is set to accelerate, according to a Reuters poll. Indian stocks are trading at a record high, partly in anticipation of that. However, Arihant Capital's whole time director Anita Gandhi says, "If RBI gets confirmation that inflation will remain in the lower territory, there is a possibility of a further rate cut."