The new Monetary Policy Committee (MPC) decided unanimously to implement a rate cut in its first review. That brings the Repurchase (repo) rate down to 6.25 per cent with consequent adjustments of the reverse Repo to 5.75 per cent and the MSF (marginal standing facility) to 6.75 per cent.
The stock market had a favourable response. The consensus was slightly in favour of status quo so, there will be fresh long positions. Obviously, the financial sector will see more of a boost than the broad market. Housing finance and NBFCs will gain some fresh momentum alongside banks.
The Reserve Bank of India (RBI) is confident that it can meet targets of consumer price index (CPI) inflation at five per cent by Jan-Mar 2017 and the medium-term target of four per cent CPI (within a band of +/- 2 per cent). Agricultural performance has been good and food inflation will reduce. Fuel inflation has been low. Core inflation (excluding food, fuel) has been at around five per cent. Household inflationary expectations are up.
Patel debuts with rate cut
WHY RBI DECIDED TO CUT RATE
- Expects global growth forecast to be lowered
- IMF has retained 2017 world growth forecast at 3.4%, compared with 3.6% in Jan
- Says sharp downturn in food prices will lead to softer inflation numbers
- Food inflation fell to 5.91% in August from 8.35% in July
- Cites low fuel inflation
- Crude oil prices steady at around $50 a barrel
- Input costs firm up but companies don’t have pricing power
- Capacity utilisation of manufacturing firms at 72.9% in Q1 FY17 from 74% in Q4 FY16
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