RBI reduces repo rate by 25 bps to 5.75%

Changes monetary policy stance to accommodative from neutral

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) at its Second Bi-monthly Monetary Policy Statement 2019-20 has announced 25 bps reduction in the policy repo rate under the liquidity adjustment facility (LAF) to 5.75% from 6.0% with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.50%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.0%.

The MPC also decided to change the stance of monetary policy from neutral to accommodative. 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.

In the bi-monthly monetary policy resolution of April 2019, CPI inflation was projected at 2.4% for Q4:2018-19, 2.9-3.0% for H1:2019-20 and 3.5-3.8% for H2:2019-20, with risks broadly balanced. The headline inflation outcome in Q4 at 2.5% was largely in alignment with the April policy projections. Taking into consideration the impact of recent policy rate cuts and expectations of a normal monsoon in 2019, the path of CPI inflation is revised to 3.0-3.1% for H1:2019-20 and to 3.4-3.7% for H2:2019-20, with risks broadly balanced.

In the April policy, GDP growth for 2019-20 was projected at 7.2% - in the range of 6.8-7.1% for H1 and 7.3-7.4% for H2 - with risks evenly balanced. GDP growth for 2019-20 is revised downwards from 7.2% in the April policy to 7.0% - in the range of 6.4-6.7% for H1:2019-20 and 7.2-7.5% for H2 - with risks evenly balanced. The MPC notes that growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy. A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern. The headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts. Hence, there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate.

Against this backdrop, all members of the MPC unanimously decided to reduce the policy repo rate by 25 basis and change the stance of monetary policy from neutral to accommodative.

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