Nothing sacred about 25 bps: RBI Governor on interest rate cut

Mumbai, Aug 7 (IANS) Marking a paradigm shift, the Reserve Bank of India (RBI) on Wednesday bid adieu to the conventional practice of lowering or raising interest rates in multiples of 25 basis points (bps), insisting there was nothing sacred about the figure.

The central bank slashed its repo, or short-term lending rate for commercial banks, by 35 basis points (bps) -- from 5.75 per cent to 5.40 per cent -- to boost growth.

RBI Governor Shaktikanta Das said the RBI's Monetary Policy Committee (MPC) found 35 bps sufficient for the time period, as 25 bps would have been "inadequate" and 50 bps would have been "excessive".

Das had dropped a hint on this possible move in a speech earlier in the year.

"A thought comes to my mind that if the unit of 25 basis points is not sacrosanct and just a convention, monetary policy can be well served by calibrating the size of the policy rate to the dynamics of the situation," he had said.

"...and the size of the change itself can convey the stance of policy. For instance, if easing of monetary policy is required but the central bank prefers to be cautious in its accommodation, a 10 basis points reduction in the policy rate would perhaps communicate the intent of authorities more clearly than two separate moves -- one on the policy rate, wasting 15 basis points of valuable rate action to rounding off, and the other on the stance, which in a sense, binds future policy action to a pre-committed direction," he had added.

Das had explained that "in a situation in which the central bank prefers to be accommodative but not overly so, it could announce a cut in the policy rate by 35 basis points if it has judged that the standard 25 basis points is too little, but its multiple, i.e. 50 basis points is too much."

According to the Governor, "This approach can also be useful when the central bank is in tightening mode and potentially help avoid policy turnaround from forward guidance via a stance too far into the future, which in a highly volatile global scenario may not even be a year."

--IANS

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Source : ians

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