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RBI cuts key interest rates; projects GDP growth at 7.4%, limit of collateral-free agriculture loans increased

File photo. Photograph:( Reuters )

WION Web Team New Delhi, Delhi, India Feb 07, 2019, 11.53 AM (IST)

The Reserve Bank of India(RBI) today cut the repo rate by 25 basis points to 6.25 per cent.

Repo rate is the interest at which the banks borrow from the central bank whenever it experiences a funds shortfall. 

The central bank said in the financial year India's GDP growth was seen at 7.4 per cent against the government's forecast of 7.2 per cent.

Four of six members of the monetary policy committee (MPC) voted to cut the rates, while all six members voted for a change in the stance. Two MPC members Chetan Ghate and Viral Acharya were for status-quo in rates, the RBI informed. 

The central bank had 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.

The RBI revised downwards the retail inflation forecast to 2.8 per cent for the last quarter of the current fiscal on account of favourable factors including benign monsoon.

The RBI in its last bi-monthly monetary policy announcement for the current fiscal also lowered the retail inflation forecast for the first half of next fiscal beginning April, to 3.2-3.4 per cent.

For the third quarter of 2019-20, the inflation target is set at 3.9 per cent. The central bank raised limit of collateral-free agriculture loans to Rs 1.6 lakh from the current Rs 1 lakh.

"Several factors will shape the inflation path, going forward. First, food inflation has continued to surprise on the downside with continuing deflation across several items and a significant moderation in inflation in cereals. Several food groups are experiencing excess supply conditions domestically as well as internationally," RBI said.

Union budget proposals will boost demand by raising disposable incomes, but it may take time to play out, newly-appointed RBI governor Shaktikanta Das said in his first press conference.

"Looking beyond the current year, the growth outlook is likely to be influenced by... Aggregate bank credit; and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based," the MPC said.

It further said that 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.

"In particular, trade tensions and associated uncertainties appear to be moderating global growth," it said.