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BL Research Bureau
While the decision to cut the repo rate was unanimous, members of the six-member Monetary Policy Committee (MPC), differed over the quantum. Dr Ravindra H Dholakia, one of the members voted for a higher cut of 40 bps, whereas all other members voted for a 25 bps cut to the repo rate.
After the MPC meeting on October 4, 2019, the repo rate was cut for the fifth time, taking the cumulative cut to 135 bps in CY2019 so far.
Also read:RBI cuts repo rate by 25 bps to 5.15%
Looking at the cumulative cuts in repo rates in the past, the highest cumulative rate cut in one calendar year, was in 2002, when rates were lowered by 300 bps. The repo rate was lowered to 5.5 per cent in October 2002. The next highest was seen in 2009, when the repo rate was cut thrice to 4.75 per cent — a cumulative cut of 175 bps.
With three more months left in 2019 and another rate cut likely in December’s policy meeting, it would be interesting to see how close we get to the 2009 figure.
More room for another cut?
The growth projections were revised lower by the MPC for FY20 by 80 bps. Economists feel that this coupled with the “accommodative stance” makes a series of rate cuts through FY20 highly likely. But the number and quantum of cuts could depend on the macro data points.
The MPC maintained its inflation projections for the second half of FY20 at 3.5-3.7 per cent. Considering the real interest rate band, which the MPC would want to maintain (1.25 to 1.75 per cent above the CPI) the repo rate can go as low as 4.75.
This could imply a maximum cut of another 40 bps.
Since 2001, the repo rate was the lowest at 4.5 per cent, after a 50 bps cut in August 2003. If that could provide any direction to where the MPC is headed towards, further 65bps cut is the maximum, we can expect.
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