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Rate Cut by RBI
Oct 07, 2016

The Monetary Policy Committee (MPC) decided at its first policy review to reduce the benchmark repurchase rate by 25 basis points to 6.25 per cent. The Reserve Bank of India’s key policy interest rate has now been cut to its lowest level since 2011.

Key Points

  • For the first time, a MPC, and not just the Reserve Bank of India governor, is taking a call on policy rate.
  • The six-member MPC was unanimous in its decision. The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index inflation at 5 percent by Q4 of 2016-17.
  • The six-member panel, headed by new governor Urjit Patel, believes that food inflation momentum has moderated and opened up space for policy action.
  • The MPC review marks a perceptible shift in the RBI’s policy stance. Firstly, the policy statement was silent on the future policy outlook, while clearly outlining the outlook for growth-inflation dynamics. A clear timeline to get to the 4% inflation target was not spelt out.
  • The MPC sees retail inflation centering around 5% by March 2017 with upside risks to the forecast. It said these risks were lower than those seen at the previous two policy reviews in June and August when RBI left rates steady.
  • Retail inflation fell to 5.05% in August from 6.07% in July, driven by a drop in vegetable prices.
  • Higher sowing of crops and supply management measures have helped curb rising food prices.
  • While the MPC too noted that there were concerns that inflation might be impacted by the implementation of the seventh pay commission and other factors, the panel chose to reduce rates, unanimously, citing the easing expected in food inflation due to a much better monsoon and the government’s moves to cool food inflation.
  • It also warned that weak global demand and dampened private investment posed risks to growth during the next fiscal year.

Monetary Policy Committee

  • The MPC is an executive body of six members that will decide on policy rate for the RBI. Three members are from the central bank and three others are nominated by the government.
  • All members will have a vote each, but in case of a tie, the RBI governor has a casting vote to break the tie.
  • The MPC will meet for two days before deciding on rates.
  • The members from the RBI are Governor (Urjit Patel), deputy governor in charge of monetary policy (R. Gandhi) and an RBI-nominated executive (Michael Patra, RBI executive director).
  • The other three members are nominated by the government. Currently, the three external members are well esteemed academicians —Chetan Ghate, Pami Dua and Ravindra H. Dholakia. These external members will hold office for four years.
  • The mandate of the MPC is to keep inflation within the central point of 4% for the next five years, while keeping growth considerations in mind. The tolerance band for inflation is 2% on both sides of the central point. If the targets are not met for three consecutive readings, the MPC  will have to give in writing to the government why it failed to meet the desired objective.
  • The MPC improves transparency and brings a collective approach to the inflation problem. According to the mandate, the MPC will have to release the minutes of the meetings 14 days after the meet, which are expected to reveal how a member voted and why.


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