Money & Banking

To spur economy, RBI cuts repo rate by 25 bps to 5.75%

Our Bureau Mumbai | Updated on June 06, 2019 Published on June 06, 2019

MPC switches to ‘accommodative’ stance; trims GDP growth forecast to 7 per cent for FY20

To spur economic activity, which decelerated sharply in the January-March quarter, the Reserve Bank India’s Monetary Policy Committee (MPC) unanimously decided to cut the policy repo rate by 25 basis points and change the monetary policy stance from ‘neutral’ to ‘accommodative’.

This is the third time on the trot that the six-member MPC has decided on a 25-basis points rate cut, making it a hat-trick of repo rate cuts. The rate cut also comes in the backdrop of benign retail inflation.

Following the MPC decision, the repo rate now stands at 5.75 per cent against 6 per cent earlier.

Read here the Second Bi-monthly Monetary Policy Statement, 2019-20

The last time that the repo rate was at 5.75 per cent was in the July-September 2010 period. The RBI last had an ‘accommodative’ monetary policy stance during the January 2015 to early February 2017 period.

RBI Governor Shaktikanta Das said: “The unanimous vote reflects the resolve of the MPC to act decisively and to act in time…The RBI will ensure that adequate liquidity is available in the system for all productive purposes. An accommodative stance basically means that rate increase is off the table.”

The MPC noted that growth impulses have weakened significantly as reflected in a further widening of the output gap (the difference between the actual output of an economy and its potential output) 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 committee said.

“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.”

Underscoring that out of the cumulative 50 bps cut in repo rate effected in February and April 2019, just 21 bps have flowed through to the lending rate on fresh rupee loans, Das expected that going forward, there will be higher and faster transmission of the repo rate cut.

“So, this transmission (of repo rate cut into lending rates) will naturally find its impact on consumer loans, consumer durables loans, two-wheeler loans, etc. There are good chances of interest rates on new loans in these segments coming down,” the Governor said.

Inflation and GDP projections

The revised CPI (consumer price index based) inflation projection is up a shade to 3-3.1 per cent (from 2.9-3 per cent projected earlier) for the first half of FY20 and down a tad to 3.4-3.7 per cent (3.5-3.8 per cent) for the second half, with risks broadly balanced.

 

The MPC said risks around the baseline inflation trajectory emanate from uncertainties relating to the monsoon, unseasonal spikes in vegetable prices, international fuel prices and their pass-through to domestic prices, geo-political tensions, financial market volatility and the fiscal scenario.

The GDP growth for 2019-20 has been revised downwards from 7.2 per cent in the April policy to 7 per cent – in the range of 6.4-6.7 per cent for the first half of FY20 (against earlier projection of 6.8-7.1 per cent) and 7.2-7.5 per cent (7.3-7.4 per cent) for the second half – with risks evenly balanced.

Published on June 06, 2019
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