Mumbai, Aug 2 - Subdued inflation and demand prompted India's central bank, the RBI, on Wednesday to reduce its key lending rate by 25 basis points (bps). According to the Reserve Bank of India's third bi-monthly monetary policy review of 2017-18, the repurchase rate, or the short-term lending rate for commercial banks on loans taken from it, stands lowered to 6% from 6.25%.
Subsequently, the reverse repo rate, or the short-term borrowing rate, has been adjusted to 5.75% from 6%. The decision to maintain the repo rate was taken by the six-member Monetary Policy Committee (MPC) headed by Patel. Four members of the panel voted in favour of reducing the key lending rate.
The six members of MPC are equally divided amongst government nominees and the RBI. At its last policy review in June, the RBI had kept the key lending rates unchanged but induced liquidity by reducing Statutory Liquidity Ratio (SLR).
The reduction in key lending rates comes after four consecutive policy reviews in which the apex bank had maintained status quo on its repo, or short-term lending rate, since RBI reduced it by 25 basis points to 6.25% in October 2016.
"The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of plus, minus 2%, while supporting growth," the third bi-monthly monetary policy statement said.
"The MPC noted that some of the upside risks to inflation have either reduced or not materialised... Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap. Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points," the statement said. "Noting, however, that the trajectory of inflation in the baseline projection is expected to rise from current lows, the MPC decided to keep the policy stance neutral and to watch incoming data. The MPC remains focused on its commitment to keeping headline inflation close to 4% on a durable basis."
Other factors that led to the MPC in reducing the key lending rates were the "smooth implementation of the GST" and a healthy monsoon.
However, the equity markets which had already discounted a 25 bps cut were lacklustre just after the MPC's decision was announced. Around 2.30 p.m., the Nifty fell by 21.90 points, or 0.22%, to trade at 10,092.75 points. The Sensex, which opened at 32,641.58 points, traded at 32,515.81 points -- down 59.36 points, or 0.18%, from its previous close at 32,575.17 points.