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RBI consultation to change 25 bps cut norm soon

IANS
The RBI could soon start discussions to break away from the convention of reducing key policy rate by 25 basis points or multiples thereof shortly with stakeholders like lenders, domain experts and within the Central Bank.

New Delhi: The RBI could soon start discussions to break away from the convention of reducing key policy rate by 25 basis points or multiples thereof shortly with stakeholders like lenders, domain experts and within the Central Bank.

"There is a need to consider interest rate adjustments, not necessarily in the conventional way of 25 bps or multiples thereof. This idea needs further debate and discussion," earlier this month RBI Governor Shaktikanta Das had told the Monetary Policy Panel.

Sources said the apex bank would seek comments from banks on their views and reasons of holding that view with empirical evidence and from monetary policy experts and within the central bank itself but added that it’s not something that would be done without scrutinising the global practice, consultations, debates and counter arguments. But the process would start soon.

It could not be ascertained if the change in the policy rate cut practice of 25 bps could take shape this fiscal as the source said "there would be no rush decisions".

It is learnt that finance ministry also favours this idea though the government would leave it to the RBI to do the due diligence and take a call. But the Finance Ministry would be kept in the loop as any such decision's impact would have effect on the overall economy and banks and the credit available for lendings to support growth.

After throwing the idea at the MPC meeting in April 4, later in the recent "Governor Talks" programme on the sidelines of the International Monetary Fund (IMF)-World Bank Spring Meetings in Washington, Governor Das in fact sought views from global central banks to think outside the convention of 25 bps cut. But in the same breath he also had said that he would "rather wait for more reactions, comments and observations from other central banks" on the idea.

"If the unit of 25 basis points is not sacrosanct and just a convention, monetary policy can be well served by calibrating the size of the policy rate to the dynamics of the situation and the size of the change itself can convey the stance of policy," he had said.

Earlier this month, RBI cut repo rate by 25 basis points to 6 per cent in the second successive reductions in as many months to support growth. Repo rate is the interest rate at which the central bank provides liquidity to banks to overcome short-term liquidity mismatches.