RBI cuts repo rate, sounds caution on inflation
Q. RBI has released the Monetary Policy on Oct 4th 2016. By how many basis points has it cut the repo rate?- Published on 05 Oct 16a. 15
b. 25
c. 35
d. 45
ANSWER: 25
The Reserve Bank of India on 4th October 2016 cut the repo rate by 25 basis points and also said the key takeaways from the RBI policy were as follows:
- The RBI indicated international growth has slowed more than anticipated through 2016 so far
- Brexit, banking stress in Europe, Chinese debt, rising protectionism and lowered confidence in monetary policy were key risks.
- World trade volume contraction was sharper than anticipated in the first half of 2016, and the outlook was bleak
- As global markets have shrugged off the Brexit vote, an uneasy calm remains regarding uncertainty about the stance of monetary policy of systematic central banks
- Outlook for agricultural activity in India is bright
- First advance estimated of Kharif foodgrain production for 2016-2017 was at a record high
- Industrial sector was impacted by manufacturing-driven contraction in Q2 of the fiscal following the addition of a sequential deceleration in the gross value added in Q1.
- Steel and cement production are strong but the output of the core industries as a whole was weighted down by decline in the production of coal, natural gas and crude oil
- Business expectations as per RBI’s industrial outlook survey remained expansionary in Q2 and Q3.
- Strong public investment in roads, railways and inland waterways and increased spending from the 7th Pay Commission award will strive to improve industrial outlook
- Acceleration in the pace of activity in services sector in Q1 appears to have sustained
- Inflation excluding fuel and food have been around 5 percent mainly with respect to education, medical and personal care services.
- Household inflation expectations in the Sept 2016 round of RBI survey have risen
- Input costs in the manufacturing sector including staff costs have risen but corporates lack pricing power to pass costs onto customers
- Liquidity conditions remained comfortable in Q3, while exports were down but sharp fall in imports have helped contain trade deficit
- Deficit in remittances and flattening of software earnings may have to be watched
- Forex reserves stood at record high of USD 372 billion by Sept 30, 2016
- RBI also cut the key lending repo rate to 6.25 percent as the panel felt inflation levels were low enough to reduce loan rates
- Six member Monetary Policy Committee headed by governor Urjit Patel has agreed that inflation was unlikely to overshoot the threshold level of 6 percent.
- A lower repo rate at which banks borrow from the RBI would mean households may expect cheaper bank loans to buy houses and goods such as cars
- GoI has also announced measures to control food inflation pressures, especially with regard to pulses- measures will control the momentum of food inflation in coming months
- While Indian economy grew by 7.1% in April to June period (the slowest in 6 quarters) RBI and MPC have expected a revival in coming months boosted by rain and government bonanza for its employees
