Debutants- MPC and Patel make a rocking start with rate cut

The first monetary policy review after takeover of the Monetary Policy Committee and the new Governor Urjit Patel has made a 25 basis cut in the policy rate. The repo rate is now brought down to 6.25% – the lowest rate in six years.

The new policy rate decision marks a new era in India’s central banking with the takeover of the monetary policy decision by a body -the Monetary Policy Committee (MPC). It is a half-government and half central bank body – where the RBI Governor enjoys a meager privilege of casting vote.

 Formalities in monetary policy reviews also changed with the new body as the decision notes to be published immediately.

With MPC, the finance ministry can exert considerable influence on the central bank through its appointed nominees. The entire experiment came with the launch of inflation targeting monetary policy framework.

Today’s decision also is the first one for Governor Urjit Patel, who took over from Raghuram Rajan last month.

The MPC has stated that the rate cut is consistent with the overall inflation target of 5 per cent. “The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent within a band of +/- 2 per cent, while supporting growth.”

The Central bank observed that the inflation situation and inflation expectations are conducive for supporting the rate cut.

With the new repo rate, the reverse repo rate is now 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate will change to 6.75 per cent.