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RBI cuts repo rate to 6%: Five things to know about repo, reverse repo rate and the Indian economy

Now, the repo rate stands at 6 per cent, the lowest since November 2010. The reverse repo rate has been lowered to 5.75 percent.

BT Online        Last Updated: August 2, 2017  | 16:08 IST
Reserve Bank of India cuts repo rate: Five things to know about apex bank's key decision
RBI Governor Urjit Patel

The Reserve Bank of India on Wednesday cut repo and reverse repo rate by 25 basis points, in line with market expectations. Now, the repo rate stands at 6 per cent, the lowest since November 2010. The reverse repo rate has been lowered to 5.75 percent. One basis point is a hundredth of a percentage point.

Of the six members in the monetary policy committee headed by governor Urjit Patel, five were in favour of a rate cut while one voted for a status quo.

Also read: Reserve Bank cuts repo, reverse repo rate by 25 basis points

Dr. Chetan Ghate, Dr. Pami Dua, Dr. Viral V. Acharya and Dr. Urjit R. Patel were in favour of the monetary policy decision, while Dr. Ravindra H. Dholakia voted for a policy rate reduction of 50 basis points and Dr. Michael Debabrata Patra voted for status quo.

Also read: RBI to issue new Rs 200 notes next month, stops printing Rs 2000 notes

The Reserve Bank said 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 per cent within a band of plus or minus 2 per cent, while supporting growth.

Here is a lowdown on the third bi-monthly monetary policy review of 2017-18.

Agriculture

On the domestic front, a normal and well-distributed south-west monsoon for the second consecutive year has brightened the prospects of agricultural and allied activities and rural demand.

By August 1, rainfall was 1 per cent above the long period average (LPA) and 84 per cent of the country's geographical area received excess to normal precipitation. Kharif sowing has progressed at a pace higher than last year's, with full-season sowing nearly complete for sugarcane, jute and soyabean.

The initial uncertainty surrounding sowing of pulses barring tur and rice in some regions has also largely dissipated. Sowing of cotton and coarse cereals has exceeded last year's levels but for oilseeds, it is lagging.

Overall, these developments should help achieve the crop production targets for 2017-18 set by the Ministry of Agriculture at a higher level than the peak attained in the previous year.

Meanwhile, procurement operations in respect of rice and wheat during the rabi marketing season have been stepped up to record levels - 36.1 million tonnes in April-June 2017 - and stocks have risen to 1.5 times the buffer norm for the quarter ending September.

Industry

The Reserve Bank said industrial performance has weakened in April-May 2017. This mainly reflected a broad-based loss of speed in manufacturing. Excess inventories of coal and near stagnant output of crude oil and refinery products combined to slow down mining activity.

For electricity generation, deficiency of demand seems to remain a binding constraint. In terms of uses, the output of consumer non-durables accelerated and underlined the resilience of rural demand.

The weakness in the capex cycle was also evident in the number of new investment announcements falling to a 12-year low in Q1, the lack of traction in the implementation of stalled projects, deceleration in the output of infrastructure goods, and the ongoing deleveraging in the corporate sector.

The output of core industries was also dragged down by contraction in electricity, coal and fertiliser production in June, owing to excess inventory and tepid demand. On the positive side, natural gas recorded an uptick in production after a prolonged decline and steel output remained strong.

The manufacturing purchasing managers' index (PMI) moderated sequentially to a four-month low in June and the future output index also eased marginally.

In July, the PMI declined into the contraction zone with a decrease in new orders and a deterioration in business conditions, reflecting inter alia the roll out of the GST; however, both new export orders and the future output index rose, reflecting optimism in the outlook.

Economy

On the state of the economy, the MPC is of the view that there is an urgent need to reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs of all.

This hinges on speedier clearance of projects by the States. On their part, the government and the Reserve Bank are working in close coordination to resolve large stressed corporate borrowers and recapitalise public sector banks within the fiscal deficit target. These efforts should help restart credit flows to the productive sectors as demand revives.

Services sector

In contrast to manufacturing, high frequency real indicators of services sector activity point to a mixed picture in Q1. In the transportation sub-sector, freight carriage by air registered a strong performance sequentially and on an annual basis. Commercial vehicle sales rose after two successive months of contraction in response to the Bharat Standard (BS)-IV emission compliance switchover.

Sales of passenger cars and two-wheelers suffered temporary dislocation in June even as motorcycle sales continued to grow for the third consecutive month, reflecting the firmness of rural demand. Activity in the communication sub-sector accelerated in May on strong and sustained growth in the subscriber base of voice and data services.

The hospitality sub-sector was supported by vigorous growth of foreign tourist arrivals and air passenger traffic. The acceleration in steel consumption in April-May may be a precursor to a pickup in construction activity in Q1, but cement production remains in contraction mode. The PMI for the services sector continued to remain in expansion mode in May-June on expectations of improvement in market conditions.

Inflation

In June, retail inflation measured by year-on-year changes in the CPI plunged to its lowest reading in the series based to 2011-12. This was mainly the outcome of large favourable base effects which are slated to dissipate and reverse from August.

Although month-on-month rise in the price level have been picking up since April, they were weak in relation to the typical food-price driven summer uptick.

The delay in indirect tax revisions and anecdotal evidence of clearance sales across commodities could have dampened the momentum.

Excluding food and fuel, CPI inflation moderated for the third month in succession in June, falling to 4 per cent as price momentum moderated inter alia in respect of education due to delay in fee revision cycles, and also in respect of health, clothing and footwear.

Inflation in transport and communication services was depressed by the pricing war in the telecommunication space. Input costs relating to both industry and farms remain benign tracking international prices.

Pricing power polled in the Reserve Bank's industrial outlook survey and in manufacturing and services PMIs is still subdued.

Looking ahead, as base effects fade, the evolving momentum of inflation would be determined by

(a) The impact on the CPI of the implementation of house rent allowances (HRA) under the 7th central pay commission (CPC)

(b) The impact of the price revisions withheld ahead of the GST

(c) The disentangling of the structural and transitory factors shaping food inflation.

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