RBI surprises, cuts repo rate by 50 bps; keeps CRR at 4%..

The Reserve Bank of India (RBI) lowered the benchmark repo rate by 50 basis points to 6.75 percent, while keeping CRR and SLR unchanged at 4 percent and 21.5 percent, respectively. This marks the fourth repo rate cut by the RBI since January 2015.

However, it has lowered its FY16 GDP growth target to 7.4 percent from 7.6 percent. It also said the focus should now shift to bringing inflation down to 5 percent by FY17-end. The repo rate was last at 6.75 percent in March 2011.

 The focus of monetary action in the near term will now shift towards removing impediments in rate cut transmission by banks, the RBI said. It also intends to work with the government to ensure that banks pass on the bulk of the cumulative 125 basis points cut since January this year.

      "A further monetary policy accommodation will be conditioned by the abating of recent inflationary pressures, the full monsoon outturn, possible Federal Reserve actions and greater transmission of its front-loaded past actions," the RBI press release said.

    Governor Raghuram Rajan said the RBI intends to be as accomodative as possible given its inflation targets and with this 50 basis points rate cut, he has front-loaded action. However, the RBI cautioned that since the third bi-monthly statement of August 2015, global growth has moderated, especially in emerging market economies (EMEs), global trade has deteriorated further and downside risks to growth have increased.

 As far as India is concerned, a tentative economic recovery is underway, but is still far from robust, the RBI statement stated. 

 However, there are a lot of questions on the impact of poor monsoon on inflation. The RBI said looking forward, inflation is likely to go up from September for a few months as favourable base effects reverse. The RBI expects the outlook for food inflation to improve if the increase in sown area translates into higher production.

   "Moderate increases in minimum support prices should keep cereal inflation muted, while subdued international food price inflation should continue to put downward pressure on the prices of sugar and edible oil, and food inflation more generally," RBI said. 

 Rajan also expects pro-active supply-side management by the government. "It is important that pro-active supply-side management by the government be in place to head off any food price pressures should they materialise, especially in respect of onion and pulses.

" RBI said it expects CPI inflation to average around 5.5 percent in October-December and 5.8 percent in January-March 2016 and finally moderate to 4.8 percent in January-March 2017. The RBI has also said that foreign investment cap in government bonds will be relaxed in phases to 5 percent by March 2018. A hike in foreign investment limit in bonds will be announced every March and September.

The foreign investment limits in debt will be fixed in rupee terms. In aggregate terms, this is expected to open up room for additional investment of Rs 1,20,000 crore in the limit for central government securities by March 2018 over and above the existing limit of Rs 1,53,500 crore for all government securities (G-sec). Also, the RBI said Indian corporates can now issue rupee denominated bonds with a minimum maturity of five years at overseas locations within the ceiling of foreign investment permitted in corporate debt (USD 51 billion at present).