In the first bi-monthly monetary policy after Shaktikanta Das took charge as the governor, the Reserve Bank of India (RBI) has cut repo rate by 25 basis points to 6.25 per cent from 6.5 per cent.
The RBI has also changed its stance to neutral from 'calibrated tightening'. The surprise dovish move by the RBI has left the markets and analysts surprised.
The RBI has also revised its GDP projection for 2019-20 to 7.4 per cent. The inflation rate is estimated at 3.2-3.4 per cent in the first half of the year 2019-20 and 3.9 per cent in the third quarter of 2019-20.
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Governor Das said that the RBI has recieved a proposal for an umbrella organisation for urban cooperative banks. "The RBI has decided on this positively. A decision on the specifics of the umbrella organisation proposal will be taken shortly," he said.
The central bank also expected the headline inflation to remain contained below or at its target of four per cent. "This has opened space for policy action. Investment activity is recovering supported mainly by public spending on infrastructurem," Das said.
While the neutral stance was as widely expected, the cut in repo rate was not anticipated on account of the recent interim budget that has promised a slew of sops for the masses ahead of the 2019 general elections.
READ: RBI unlikely to cut repo rate, but may change stance to neutral
This is the first bi-monthly monetary policy this year and after Urjit Patel stepped down as the RBI governor in December 2018. Market analysts had predicted RBI's dovish stance as the inflation had cooled down. CPI inflation touched a 18-month low of 2.19 per cent, versus 2.33 per cent in the previous month. The wholesale price inflation in December hit a eight-month low of 3.8 per cent.
It now remains to be seen how the central bank tackles the fiscal deficit problem. The Centre missed the fiscal deficit target in the interim budget announced last week. This led the IMF to issue a warning saying greater efforts will be needed to reduce India's fiscal deficit as the interim budget envisages a slower pace of fiscal consolidation than previously planned.
