In this first MPC policy review since Dr Urjit Patel took over as Governor and also, the fourth bi-monthly for the current fiscal year, the decision on rate cut was unanimous by the six-member Monetary Policy Committee. The repo rate cut takes immediate effect.

MPC has taken a robust view of the outlook for growth in fiscal 2017 after a normal monsoon and an expected surge in consumption demand with the pay revisions.

The RBI announcement said with repo rate reduction, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent.

The decision of the MPC, the statement added, is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by March 2017 and the medium-term target of 4 per cent within a band of +/- 2 per cent.

The repo rate had been held at 6.5 per cent for several months by the former Governor Dr Raghuram Rajan on the basis of inflation trends, in the central bank’s disinflation trajectory. But Dr Rajan had maintained accommodative stance of the policy after a series of rate cuts totalling Rs 150 basis points.

However, the transmission of these cuts to borrowers had been lagging depriving them the benefit of lower lending rate.

The MPC now envisages a trajectory taking headline CPI inflation towards a central tendency of 5 per cent by March 2017, with risks tilted to the upside albeit lower than in the second and third bimonthly monetary policy statements of June and August respectively.

The momentum of growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the stimulus to the urban consumption spending from the pay commission’s award.

The accommodative stance of monetary policy and comfortable liquidity conditions should support a revival of credit to the productive sectors.

The continuing sluggishness in world trade and smaller terms of trade gains than in the past point, however, to further slackening of external demand going forward. Accordingly, the projection of growth of real gross value added (GVA) for 2016-17 is retained at 7.6 per cent, with risks evenly balanced around it.

MPC expects 'the strong improvement in sowing, along with supply management measures, will improve the food inflation outlook.”

It noted that the “sharp drop in inflation reflects a downward shift in the momentum of food inflation – which holds the key to future inflation outcomes – rather than merely the statistical effects of a favourable base effect'.

The Government, MPC notes, has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action, as indicated in the third bi-monthly monetary policy statement.

The easy liquidity conditions engendered by the Reserve Bank’s operations should also enable the smooth transmission of the policy action through various market segments. Furthermore, MPC said, banks should find added impetus for better transmission by the recent downward adjustment in small savings rates.

The only note of caution in the resolution was potential cost push pressures that may emerge, including the 7th pay commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices.'The fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root.' it said. (IPA Service)