RBI cuts repo rate in first policy review under new governor

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The RBI has also changed its stance to "neutral" from existing "calibrated tightening".

The central bank also changed its monetary policy stance - a key signalling indicator to the markets -to "neutral" from "calibrated tightening". MPC members Viral Acharya and Chetan Ghate voted against a rate cut. However, it remains to be seen if the banks will quickly pass on the benefits of the rate cut to the borrowers.

The government is already in an election mode.

Addressing the media on MPC's decision, Das said that GDP projection for 2019-20 is 7.4%.

Repo is the rate at which RBI lends to commercial banks, whereas reverse repo is the short-term borrowing rate at which the central bank borrows from other banks.

India's last rate cut, to 6.00 percent, was in August 2017. In its budget on February 1, the government doled out cash to farmers and tax cuts to middle-class families, at the cost of a wider fiscal deficit and larger borrowing.

RBI's decision to slash the repo rate by 25 basis point to 6.25 per cent is a welcome and unexpectedly positive move, given the sops that the recent expansionary budget gave to farmers at an additional cost of Rs 75,000 crore per annum. While RBI's mandate is price stability (targeting inflation), the RBI Act also says that it needs to do so "keeping in mind the objective of growth", Das said then to make his point.

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India's retail inflation declined from 3.4 per cent in October 2018 to 2.2 per cent in December, well below the bank's target of four percent. The CSO has estimated GDP growth at 7.2 per cent for 2018-19.

This sixth bi-monthly policy is Das's first as the central bank's Governor and the first policy after Budget.

"The central bank's commentary on inflation and growth support a dovish outlook for the policy", said Shashank Mendiratta, an economist with IBM in New Delhi, adding "The macro backdrop as such supports the RBI's stance".

Economic growth fell to a worse-than-expected 7.1% in the July-September quarter from 8.2%, dragged down by slower consumer spending and farm growth, below analysts forecast for a 7.4% increase.

The Reserve Bank of India headed by a new chief, Shaktikanta Das, will probably drop its hawkish bias on Thursday, the first step toward a possible interest-rate cut this year as inflation drifts lower and the economy slows.

The rupee weakened to 71.69 to the dollar immediately after the decision, but it later strengthened to 71.42.

The NSE index was up 0.04 percent at 11068.05 while the 10-year benchmark government bond yield fell to 7.51 percent from Wednesday's close of 7.56 percent.