RBI reduced Repo rate by 25 basis points to 7.5 percent

The Reserve Bank of India (RBI) on 4 March 2015 reduced the repo rate by 25 basis points to 7.5 percent with immediate effect. This is the second time since January 2015 that RBI reduced the repo rate by 25 basis points.

With this, the reverse repo rate under the LAF stands adjusted to 6.5 percent, and the marginal standing facility (MSF) rate and the Bank rate to 8.5 percent.

The RBI reduced the repo rate outside the bi-monetary policy review cycle taking into account the following developments:

• The new Consumer Price Index (CPI) rebased to 2012 was released on 12 February 2015. As per this, inflation in January 2015 stood at 5.1 percent which was well within the target of 8 percent for January 2015.
• The prices of vegetables and inflation excluding food and fuel reached a new low indicating that disinflation is evolving along the path set out by the RBI in January 2014 and at a faster pace than earlier envisaged.
• The recently-released GDP estimates based on base year 2011-12 by Central Statistical Office (CSO) pictures a steadily recovering economy which appears to be right.
• In Union Budget 2015-16, many important and valuable structural reforms has been included. This will help improve supply over the medium term and help achieve fiscal consolidation.
• The rupee remained strong relative to peer countries, thus, creating disinflationary impulses.

Why RBI acted outside the policy review cycle?

The RBI acted outside the policy review cycle because

(i) certain sectors of the economy are still weak and also there has been global trend towards monetary easing; and
(ii) the agreement on the monetary policy framework between the Union government and RBI allows RBI to go for inflation targeting.

Accordingly, the RBI seeks to bring the inflation rate to the mid-point of the band of 4 +/- 2 percent provided for in the agreement, i.e., to 4 percent by the end of a two year period starting fiscal year 2016-17.