The Reserve Bank of India's (RBI's) monetary policy committee (MPC) on Wednesday decided to reduce the repo rate by 35 basis points (bps) to 5.40 per cent to help revive the economy. It was the fourth straight rate cut by the central bank in 2019. The marginal standing facility (MSF) rate and the Bank Rate has been adjusted to 5.65 per cent.
Consequently, the reverse repo rate now stands at 5.15 per cent. The six-member committee lowered the FY20 GDP (gross domestic product) growth forecast to 6.9 per cent from 7 per cent, earlier. The central bank maintained its accommodative stance.
"Real GDP growth for 2019-20 is revised downwards from 7 per cent in the June policy to 6.9 per cent – in the range of 5.8-6.6 per cent for H1:2019-20 and 7.3-7.5 per cent for H2 – with risks somewhat tilted to the downside; GDP growth for Q1:2020-21 is projected at 7.4 per cent," the RBI said in a release.
Repo rate is the rate at which the central bank lends money to the commercial banks, in case of any shortfall of funds. Most experts had expected the RBI to cut rates to boost economic growth.
Analysts at Bank of America Merrill Lynch (BofA-ML), for instance, had expected the central bank to slash rates by 35 bps. Lending rate cuts, the research and brokerage outfit had said, are critical before busy season begins.
“Lending rate cuts are key to recovery. We expect the RBI MPC to follow Gov Das into thinking ‘out-of-the-box’ to cut rates by 35bp on August 7 from 25bp earlier. While it cut 25bp on June 6, less than our 35bp call, the policy stance also shifted to accommodative,” wrote Indranil Sen Gupta, India economist at BofAML in a policy expectation note.
A slowdown in the economy as evidenced by a constant fall in auto sales and subdued exports, analysts say, were some of the key reasons why they expected the RBI to slash rates on Wednesday.
"Indian economy is in the throes of a broad-based slowdown - sharp contraction in auto sales, slowing investments and subdued exports. The problem is accentuated by high risk aversion prevailing in the financial sector. In this backdrop, we argue some form of a stimulus is required to kick-start the economy. The recent budget focused on fiscal consolidation and hence, the entire responsibility of reviving the economy now rests on the RBI’s shoulders," analysts at Edelweiss Securities had written in a report dated August 2.
The brokerage firm had further said that the current macroeconomic environment warranted a 50 bps rate by the RBI.
The last time RBI made such consecutive cuts was after the global financial crisis (GFC) over a decade ago, when most major central banks were desperate to revive economic growth, as per a Reuters report.
“All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy. Four members (Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das) voted to reduce the policy repo rate by 35 bps, while two members (Dr. Chetan Ghate and Dr. Pami Dua) voted to reduce the policy repo rate by 25 bps,” the RBI statement added.
The committee projects the CPI inflation at 3.1 per cent for the second quarter of the financial year 2019-20 (FY20) and 3.5-3.7 per cent for the second half of the fiscal year (H22019-20), with risks evenly balanced. CPI inflation for Q1 of 2020-21 is projected at 3.6 per cent.