RBI reduces repo rate by 25 bps to 5.15%

Cuts GDP growth forecast to 6.1% for 2019-20

The Monetary Policy Committee (MPC) of the Reserve Bank of India at its meeting on 04 October 2019 has decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.15% from 5.40% with immediate effect. Consequently, the reverse repo rate under the LAF stands reduced to 4.90%, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40%.

The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

The CPI inflation projection is revised slightly upwards to 3.4% for Q2 of 2019-20, while projections are retained at 3.5-3.7% for H2 of 2019-20 and 3.6% for Q1 of 2020-21, with risks evenly balanced.

Real GDP growth forecast for 2019-20 is revised downwards from 6.9% in the August policy to 6.1% - 5.3% in Q2 of 2019-20 and in the range of 6.6-7.2% for H2 of 2019-20 - with risks evenly balanced; GDP growth for Q1 of 2020-21 is also revised downwards to 7.2%.

The MPC notes that the negative output gap has widened further. While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum. With inflation expected to remain below target in the remaining period of 2019-20 and Q1 of 2020-21, there is policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate. It is in this context that the MPC decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

All members of the MPC voted to reduce the policy repo rate and to continue with the accommodative stance of monetary policy.

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