Good news! EMIs to go down. 5 reasons why interest rates were cut

Governor of Reserve Bank of India (RBI) Urjit Patel cut repo rate by 25 basis points to 6.25%. Since 2015, the RBI has cut the repo rate by 1.50% and banks have reduced their lending rates by around 0.5%.

The six-member Monetary Policy Committee (MPC)-led by Patel took an accommodative stance to propel growth, keeping the target of 4% inflation by 2018 in focus. Presently, the inflation is at 5% and is likely to hover around 5.3% during the rest of the financial year.

The RBI stated the accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors.

There was no change in liquidity stance. The neutral rate could be at 1.25%.

The RBI said the investments and trade are weak and the international financial markets were overwhelmed by the Brexit vote.

Meanwhile, the MPC is banking on strong improvement in sowing. It notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation – which holds the key to future inflation outcomes – rather than merely the statistical effects of a favourable base effect.

Here are the reasons why Patel-led MPC cut rates:

Improvement on inflation outlook: The MPC expects that the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook. It notes that the sharp drop in inflation reflects a downward shift in the momentum of food inflation – which holds the key to future inflation outcomes – rather than merely the statistical effects of a favourable base effect.

Liquidity conditions: The repo rate cut will also ease liquidity conditions, thereby smooth transmission of the policy action through various market segments.

Growth trajectory: The MPC envisages a trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside albeit lower than in the second.

International markets: Commodity prices have firmed up slightly, easing stress for commodity exporters and shaving off some of the terms of trade gains accruing to commodity importers.

Services sector: The activity in Q1 was sustained and an increasing number of high frequency indicators moved into positive territory.
Construction is boosted by policy initiatives, and public administration, defence and other services will be supported by the pay commission award.