RBI Cuts Rate By 0.25Pct; Home, Auto Loans May Become Cheaper

Chief Economic Adviser, Arvind Subramanian said: "These cuts are consistent with the trends in the economy including strongly declining inflation, contained current account deficit and ongoing strong fiscal discipline."

The government and RBI agree that these cuts signify that the economy needs policy support as growth is recovering while the external environment remains weak, he said.

"The government and the RBI will work together to ensure that the macroeconomic (indicators) remain strong while investment and growth are accelerated towards their potential," Subramanian added.

Announcing the second bi-monthly monetary policy this fiscal, Rajan said that "with low domestic capacity utilisation, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate".

Following the downward revision in the repo rate, the reverse repo rate (short-term borrowing rate) has got adjusted to 6.25 per cent and Marginal Standing Facility rate as well as Bank rate to 8.25 per cent.

Commenting on macroeconomic conditions, RBI said, the domestic economic activity remains moderate with agriculture being the most disappointing following the unseasonal rains and hailstorms in the most part of the country in March.

Rajan said however that the risks to inflation identified in April could cloud the picture with below par monsoons forecast for the second successive year.

He also called for astute food management to mitigate possible inflationary effects in case of failure of monsoon.

Given this background, Rajan said, "a conservative strategy would be to wait, especially for more certainty on both the monsoon out-turn as well as the effects of government responses if it (monsoon) turns out to be weak.

"(But) with still weak investment and the need to reduce supply constraints over the medium-term to stay on the proposed dis-inflationary path (to 4 per cent in early 2018), a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty," Rajan said while explaining the rationale behind the rate cut.
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