The Reserve Bank of India (RBI) on Tuesday cut its key lending rate, repo, by a quarter percentage point or 25 basis points to 6.25 percent. This is the first policy where the rate decision is taken by the monetary policy committee (MPC). For Urjit Patel too, this is the first policy as RBI governor.
Since January 2015, the RBI has cut the repo rate by a cumulative 150 bps. The Consumer Price Inflation (CPI) trajectory had indicated room for the RBI for a rate cut. At the last reading (in August), the CPI inflation fell to 5.05 percent compared with 6.07 percent in July.
The RBI has set March 2017 target of 5 percent for inflation. Economists have been saying that inflation might well fall further down going ahead, given that monsoons this year have been favourable, enabling better crop output. Food price inflation, the main villain in the inflation story, has eased considerably in the recent past, giving room for further rate cuts.
However, most economists expected the RBI to postpone the rate cut to December, considering the persisting upside risks to inflation, including the impact of 7th pay commission and chances of unseasonal rains.
Read full policy statement here