Reserve Bank of India cuts short-term lending rate by 25 bps as expected

Reserve Bank of India's two-day monetary policy review meeting which ended today saw newly appointed monetary policy committee (MPC), headed by new governor Urjit Patel announce a rate cut by 25 bps. All six of the monetary policy committee unanimously voted in favour of the rate cut.

The RBI cut the short-term lending rate by 25 bps to 6.25 percent from 6.50 percent earlier and maintained that it would continue with its accommodative monetary stance with the objective of achieving consumer price index (CPI) inflation target of 5 percent.

The Reserve Bank of India said that the growth momentum in the economy would continue and that the seasonal surge in sensitive food times like pulses, fruits and vegetables may have peaked in July, considerably improving its near-term inflation outlook.

"Subdued momentum in food inflation in Q3 and the usual seasonal softening of food prices in early Q4, notwithstanding a reversal of base effects in March 2017, improves the near-term outlook for inflation considerably,” the RBI said in its report.

RBI expect inflation to ease to 4.7 percent by Q4 of 2016-17 and to 4.4 percent by Q2 of 2017-18, both within the Reserve Bank’s inflation target band. The forecasters 5 years ahead inflation expectations remained unchanged at 5 per cent, while 10 years ahead moved down to 4.5 per cent from 4.8 per cent.