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RBI cuts lending rate by 0.25%, projects GDP growth at 7.4%

This was the first monetary policy presented by Governor Shaktikanta Das after he took over in December. (file/Reuters)

The Reserve Bank of India on Thursday reduced its benchmark lending rate, or the repo rate, by 0.25 per cent with the monetary policy committee voting 4:2 in favour of the rate cut. The move may translate into lower monthly installments for home and other loans. The central bank also announced that the limit of collateral-free agriculture loans was being raised from Rs 1 lakh to Rs 1.6 lakh.

This was the first monetary policy presented by Shaktikanta Das after he took over as RBI governor in December 2018. Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Das and three others voted for a cut in interest rates. This is the first time the repo rate has been cut since August 2017.

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The committee changed the monetary policy stance from calibrated tightening to neutral.

In a statement, the central bank said that CPI inflation was marginally lower than the projected earlier and there have been downward revisions in inflation projections during the course of the year, that reflected the "unprecedented soft inflation recorded across food sub-groups."

The central bank also noted that "the output gap has opened up modestly as actual output has inched lower than potential."

"Investment activity is recovering but supported mainly by public spending on infrastructure. The need is to strengthen private investment activity and buttress private consumption," it said.

The central bank projected GDP growth for 2019-20 at 7.4 per cent.

Listing the factors that influenced the growth outlook, the central bank said, "First, aggregate bank credit and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based. Secondly, in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds."

Trade tensions and associated uncertainties appear to be moderating global growth, the bank said.

The central bank said that headline inflation is projected to remain soft in the near term. The RBI also revised down headline inflation estimates to 2.8 per cent in March quarter, 3.2-3.4 per cent in first half of next fiscal and 3.9 per cent in Q3 of FY20.

With regard to inflation, the central bank said there were "some uncertainties warrant careful monitoring."

Among the factors it listed were: vegetable prices could rise that could cause food inflation to spike, the outlook on oil price continuing to remain hazy, the impact of global trade tensions, the "unusual spike in the prices of health and education", the volatility of financial markets and any change in the monsoon outcome.

"Finally, several proposals in the union budget for 2019-20 are likely to boost aggregate demand by raising disposable incomes, but the full effect of some of the measures is likely to materialise over a period of time," the committee said in the statement.