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10 important things about the RBI repo cut

The Reserve Bank of India (RBI) on Friday lowered the repo rate by 0.25 percentage point to 5.15 per cent, in line with economists’ expectations. The central bank’s Monetary Policy Committee also maintained an accommodative stance on policy, which rules out any increase in the key interest rates for now.

All but one member of the Committee – chaired by Governor Shaktikanta Das – voted to reduce the key rate by 0.25 percentage point whereas the decision on policy stance was unanimous.

  1. The RBI has now cumulatively lowered interest rates by 135 bps this year, but said that “transmission has remained staggered and incomplete”.
  2. The central bank lowered its economic growth projection for the current financial year to 6.1 per cent, from 6.9 per cent in August. The RBI said it expects the GDP to expand 5.3 per cent in the second quarter and 6.6-7.2 per cent in the second half of 2019-20.
  3. Mr Das said the central bank will continue with the accommodative stance “as long as growth momentum stays as is and till growth is revived”.
  4. The comments from the RBI chief come at a time the economy is struggling against the lowest economic growth rate recorded in more than six years and lakhs of estimated job losses.
  5. The economy expanded just 5 per cent in the June quarter – its slowest pace since 2013 – on the back of low consumer demand and a slowdown in government spending amid global trade frictions.
  6. Several measures announced by the government in the last two months are expected to revive sentiment and spur domestic demand, said the RBI in its fourth bi-monthly policy statement of the year ending March 2020.
  7. The government has since August 23 announced measures such as a withdrawal of higher taxes on foreign investors, a mega merger plan for state-run banks to support the financial sector and a reduction in corporate taxes to push consumption and revive growth.
  8. Economists say that the GDP data for the September quarter will offer more clarity on the possibility of further monetary easing in the months to come.
  9. “The substantial cut in the GDP growth forecast for FY2020 underscores the extent of the growth slowdown, and the limited likelihood of an immediate revival despite the cumulative 135 bps of monetary easing undertaken by the MPC in 2019 as well as the measures announced by the government,” said Aditi Nayar, principal economist, Icra.
  10. The central bank raised its projection on consumer inflation – which hit a 10-month low of 3.21 per cent in August – to 3.4 per cent in the July-September quarter. It however maintained existing projections at 3.5-3.7 per cent in the second half of the current financial year and 3.6 per cent in the first quarter of next financial year.

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