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RBI signal: Budget first, rate cuts later

The Reserve Bank of India (RBI) in its sixth bi-monthly monetary policy review, 2014-15 today kept the key rates unchanged. The repo rate was unchanged at 7.75% and the reverse repo rate at 6.75%. But, RBI has cut SLR by 50 basis points to 21.5%, effective February 7. 

On January 16, 2015,  RBI governor Raghuram Rajan announced his first rate cut since being appointed RBI governor in August 2013. The move prompted a near-unanimous opinion that this could be the beginning of a new interest rate easing cycle.

Though the Reserve Bank of India (RBI) cut the interest rate on January 15, but market entities had recently told Business Standard that they expected another in the monetary policy review announced today.

While the softening of retail inflation provided RBI Governor Raghuram Rajan with room to cut rates in January, the government’s renewed commitment to sticking to the mid-term fiscal roadmap provides room for further easing, said experts. The central bank’s medium-term objective was to contain the rise of the Consumer Price Index-based inflation below 6%.

Rajan reiterated the need to see further data confirming disinflationary pressures and “high-quality fiscal consolidation”.

“Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance,” Rajan said in a statement.

RBI Governor Raghuram Rajan had in a surprise move cut the key repo rate three weeks ago by 25 basis points, but said at the time that the central bank’s ability to cut further would partly depend on the government efforts to reduce India’s fiscal deficit.

The concerns on fiscal deficit front have partially eased, especially after the government last week garnered a record amount of Rs 22,577 crore through disinvestment of 10% stake in Coal India Ltd.

The out-of-policy rate cuts last month were triggered by falling inflation rates and an unforeseen fall in oil prices to their lowest levels in years, and were seen as the beginning of an easing interest rate regime. However, further rate cuts were expected to be staggered over the year rather than in quick succession. 

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