Here are the reasons that gave RBI’s Rajan room to cut repo rate by 25 bps

RBI Governor Raghuram Rajan announced repo rate cut by 25 basis points to 6.50 per cent and maintained his accommodative stance.

The Cash Reserve Ratio (CRR) was kept unchanged at 4 per cent, whereas the reverse repo rate was increased by 25 basis points to 6 per cent.
The central bank also reduced the minimum daily maintenance of the CRR from 95 per cent to 90 per cent.

Rajan said he sees CPI easing ‘modestly’ and next aim was to achieve 5% CPI inflation in 2017.

The governor also added in times of good monsoon, low inflation, softening core inflation and further evidence of transmission of rate cuts, and all the other factors could give RBI further room to cut rates.

In all, Rajan reduced repo rate by 125 bps in 2015 and now it has brought to 6.50 per cent. The CPI dropped sharply in February due to decline in vegetables and pulses prices. Food inflation also eased. Liquidity conditions, which had tightened since mid-December, were stretched further by the larger-than-usual accumulation of cash balances by the government.

The services sector activity expanded steadily through the year, with trade, hotels, transport, communication and public administration, defence and related services turning out to be the main drivers in H2. The RBI stated global financial markets recouped the losses suffered in the turbulence at the beginning of the year. From mid-February, a firming up of crude prices buoyed market sentiment, allaying fears of global recessionary risks.

Here are the key takeaways from the RBI repo rate cut