New Delhi  : The Reserve Bank of India, which today lowered policy interest rate by a greater-than-expected extent, indicated an accommodative policy stance for the future, but said that its near-term focus would be on facilitating the pass through of its rate actions so far.

“While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed,” the central bank said in its policy statement.

Since January, the RBI has reduced the repo rate by a total of 125 bps. However, banks’ median base rates have fallen only by around 30 bps in response to the 75 bps of interest rate cuts delivered in Jan-Jun. The repo rate now stands at 6.75%, the lowest level since March 2011.

The RBI said that the rate cut is a front-loaded policy action, as greater certainty about the monetary stimulus in the pipeline would result in a stronger response on the investment front.

The central bank also noted the government has reaffirmed its desire to respect its fiscal targets and improve the quality of its spending, despite the possibility of substantial fiscal stimulus from the seventh Pay Commission Report.

“Under these circumstances, monetary policy has to be accommodative to the extent possible, given its inflation goals, while recognising that continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth.”

Chief Economic Adviser Arvind Subramanian said the government will now do “all that needs to be done”, including adhering to the fiscal deficit target and reviewing other policies, to facilitate rate cut transmission.  Welcoming the decision of the RBI to cut the repo rate by 50 basis points, Subramanian said, “The government is also committed to contributing its share by adhering to fiscal deficit targets so that inflationary pressures are contained.”

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