RBI cuts repo rate by 25 bps to 5.75%, changes stance to accommodative

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Thursday reduced the repo rate by 25 basis points (bps) to 5.75 per cent in the second bi-monthly monetary policy meet of the financial year 2019-20 (FY20), that concluded on Thursday. It was a third straight interest rate cut by the RBI. 

Repo rate is the rate at which the RBI lends money to the commercial banks, in case of any shortfall of funds. Consequently, reverse repo rate now stands at 5.50 per cent. The stance of the policy was also changed to 'accommodative' from 'neutral'. 

All members of the MPC (Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Shri Shaktikanta Das) unanimously decided to reduce the policy repo rate and change the stance of monetary policy from neutral to accommodative.

GDP forecast revised downward

The central bank also lowered its growth forecast for the economy for 2019 - 20. Weak global demand due to escalation in trade wars, the RBI feels, may further impact India’s exports and investment activity. The GDP growth projections for 2019-20 was cut to 7 per cent from 7.2 per cent, forecast in the RBI's meeting in April 2019.

"Taking into consideration the above factors and the impact of recent policy rate cuts, GDP growth for 2019-20 is revised downwards from 7.2 per cent in the April policy to 7.0 per cent – in the range of 6.4-6.7 per cent for H1:2019-20 and 7.2-7.5 per cent for H2 – with risks evenly balanced," the RBI statement said.

Policy in-line with expectation

The RBI was widely expected to go for an interest rate cut amid dismal gross domestic product (GDP) growth, subdued investment and slowdown in consumption space. Last week, government data showed GDP growth slowed to a five-year low of 5.8 per cent in the fourth quarter (Q4) of FY19.

According to a Bloomberg Survey, 31 of 43 economists had projected 25 basis point rate cut while three penciled in a 50 basis points cut. 

Elara Capital, in its report dated June 1, had said weak growth amid benign CPI inflation is expected to create room for the Monetary Policy Committee to cut the repo rate by 50-75 bps through FY20E, beginning in June 2019. 

Consumer Price Index (CPI) or retail inflation in April stood at 2.92 per cent, marginally higher than 2.86 per cent recorded in March, 2019.

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company, had said, “Liquidity woes in the banking system are far from over. The silver lining in this the expectation of government spending, this is likely to reduce the liquidity deficit in the system. Given the global as also the domestic scenario, the MPC may well choose to gratify the markets with a benchmark rate cut. What is more important for markets is the MPC guidance than the actual rate action.”