Explained: Why RBI’s decision to cut repo rate comes as a surprise

RBI interest rate,repo rate,GDP

Assuming a normal monsoon in 2019, headline inflation estimates are revised downwards to 2.8 per cent in Q4, FY19, 3.2-3.4 per cent in the first half of FY20 and 3.9 per cent during the third quarter of FY20, with risks broadly balanced around the central trajectory. MPC members Viral Acharya and Chetan Ghate voted against a rate cut.

"In the 12-month horizon, if we see that inflation remains at 3.9 or maximum of 4 percent or below, then I think there is a room to act", Das told reporters after Thursday's decision. The rate cut should help banks and other lenders bring down those rates.

The MPC meeting - the first for Das as governor - was closely watched after tension between the RBI and the government prompted his predecessor Urjit Patel to abruptly quit in December, amid government demands to relax lending curbs and hand over surplus reserves.

Technically, a 25 bps rate cut doesn't mean much to the borrower. One, there will likely be a series of rate cuts from this point and the cumulative impact will considerably put pressure on banks to pass on the benefit to the end-consumer.

The Fed has indicated it will slow its pace of rate hikes this year, having raised them four times in 2018, the European Central Bank has indicated that it is not looking to move on rates and the Bank of Japan has again lowered its inflation forecasts. That scenario may change now because the new governor has his priorities on growth very clear and may not tolerate the idea of banks ignoring the RBI cues. Meanwhile, Michael Patra and Ravindra Dholakia voted against a rate cut.

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The Reserve Bank of India (RBI) Governor Shaktikanta Das arrives to attend a news conference after a monetary policy review in Mumbai, February 7, 2019. That sends the message clear to lenders.

The central bank also projected an economic growth rate of 7.4% for the next fiscal year, up from 7.2% estimated for the current fiscal year by the Central Statistics Office (CSO).

With inflation largely under control, the big concern for the government is growth, particularly in an election year.

In today's policy also, there are enough hints to believe that inflation fight has finally been ranked down in the central bank's priority list with growth worries are beginning to dominate. Consumer inflation was an 18-month low of 2.19 percent, well below the RBI's medium-term 4 percent target.

"The MPC notes that the output gap has opened up modestly as actual output has inched lower than potential. The need is to strengthen private investment activity and buttress private consumption". Besides, it acknowledged domestic aggregate bank credit and overall financial flows to the commercial sector as robust, but yet to be broad-based.

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