Extending its rate-cutting spree into a fifth straight monetary policy review, the Reserve Bank of India's Monetary Policy Committee (MPC) on Friday slashed the repo rate by 25 basis points (bps) to 5.15 per cent.
Repo rate is the rate at which the central bank lends money to the commercial banks, in case of any shortfall in funds.
Consequently, the reverse repo rate now stands at 4.9 per cent.
Also, the central bank maintained its accommodative policy stance.
The six-member committee revised the GDP target for FY20 to 6.1 per cent from 6.9 per cent, earlier. In the rationale behind revising the growth target downwards, the statement noted that "various high frequency indicators suggest that domestic demand conditions have remained weak. The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q3. Export prospects have been impacted by slowing global growth and continuing trade tensions."
All members of the MPC voted to reduce the policy repo rate and to continue with the accommodative stance of monetary policy. Dr. Chetan Ghate, Dr. Pami Dua, Dr. Michael Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das voted to reduce the repo rate by 25 basis points. Dr. Ravindra H. Dholakia voted to reduce the repo rate by 40 basis points.
With this, the RBI has cut rate repo rate by 135 bps in 2019.
Most analysts had expected the RBI to cut interest rates, although they were unsure of the quantum following an unconventional 35 basis-point easing last time.
CPI inflation projection is revised slightly upwards to 3.4 per cent for Q2:2019-20, while projections are retained at 3.5-3.7 per cent for H2:2019-20 and 3.6 per cent for Q1:2020-21, the statement added.
While all 39 economists surveyed by Bloomberg News had expected a reduction, their forecasts varied from 15 basis points to 40 basis points.
India, which is Asia’s third-largest economy, expanded by just 5 per cent in the June quarter, its slowest pace since 2013. That had raised expectations the RBI will be forced to further downgrade its growth projection of 6.9 per cent for the current fiscal year.
"At the margin, fiscal activism could be seen as reducing the burden on monetary policy to lift growth. However, given the limited growth and inflation impact of corporate tax cuts in the near term, we do not expect the monetary policy path to materially differ. In line with this assumption, we expect the RBI to reduce the policy repo rate by more than 25bp (we forecast up to 40bp repo rate cut to 5%), owing to a sharp reduction of growth forecasts, CPI inflation within the 4% target, and to give a push to credit demand ahead of the festive season (given banks have linked their lending rates to policy repo rates)," analysts at Nomura had written in the policy preview note.
The monetary policy expectation is not just limited to rate cuts. What’s perhaps more important at this stage is to ensure their quick transmission. While aggregate liquidity conditions have improved, transmission remains slow. The RBI’s assessment of the same will be critical. Apart from this, we would watch out for the central bank’s assessment of the NBFC situation and any regulatory developments thereof, Edelweiss Securities had said in a note dated September.