Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now

You can switch off notifications anytime using browser settings.
Stock Analysis, IPO, Mutual Funds, Bonds & More

RBI cuts FY20 growth projection: Key takeaways from money policy

MPC felt a 50 basis points rate cut might have been excessive,” said Shaktikanta Das.|
Updated: Aug 07, 2019, 06.06 PM IST
RBI Governor walked the talk: Shubhada Rao, chief economist, Yes Bank
RBI Governor walked the talk: Shubhada Rao, chief economist, Yes Bank
Benign inflation, pickup in monsoon rains and growth concerns compelled the Reserve Bank of India (RBI) to cut key lending rates for the fourth time in a row on Wednesday. RBI slashed repo rate by 35 basis points, while keeping its monetary policy stance ‘accommodative’.

“MPC felt a 50 basis points rate cut might have been excessive,” said RBI Governor Shaktikanta Das.

Here are 10 key takeaways from the monetary policy:

Global growth: RBI in its release said global economic activity has slowed down since June 2019 MPC meeting amid elevated trade tensions and geopolitical uncertainty. RBI also trimmed India’s GDP growth forecast for this financial year to 6.9 per cent from 7 per cent earlier. “The MPC cut GDP growth forecast as high-frequency indicators are suggesting a slowdown,” Das said.

More rates cut ahead? The governor clarified that future policy actions will be dependent on upcoming data.

Transmission of rate cut: RBI said the transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last MPC meeting. Overall, banks reduced their WALR on fresh rupee loans by 29 bps during the current easing phase so far (February-June 2019).

Inflation: The apex bank projected CPI inflation at 3.10 per cent for Q2FY20 and 3.5-3.7 per cent for the second half of FY20, with risk evenly balanced. The MPC noted that inflation is currently projected to remain within the target over a 12-month ahead horizon. “Since the last policy, domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish. Even as past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap. Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate,” the RBI release said.

A mixed picture of slowdown: RBI said high-frequency indicators of services sector activity for May-June present a mixed picture. Tractor and motorcycle sales, indicators of rural demand, continued to contract. Among three indicators of urban demand, passenger vehicle sales contracted for the eighth consecutive month in June. However, domestic air passenger traffic growth turned positive in June after contracting for three consecutive months.

Commercial vehicle sales slowed down even after adjusting for base effects. Construction activity indicators slackened, with contraction in cement production and slower growth in finished steel consumption in June. Import of capital goods, which is a key indicator of investment activity, contracted in June.

Commodity prices: Crude oil prices fell sharply in mid-May on excess supplies from an increase in non-OPEC production, combined with a further weakening of demand. Extension of OPEC production cuts in early July did not have much impact on prices. “Gold prices have risen sharply since the last week of May, propelled by increased safe haven demand amidst rising downside risks to growth and a worsening geo-political situation. Inflation remained benign in major advanced and emerging market economies,” RBI said.

Monsoon outcome: On the domestic front, the southwest monsoon gained intensity and spread with the cumulative rainfall 6 per cent below the long-period average (LPA) up to August 6, 2019. In terms of its spatial distribution, 25 of the 36 sub-divisions received normal or excess rainfall as against 28 sub-divisions last year. The total area sown under kharif crops was 6.6 per cent lower as on August 2 than a year ago. The live storage in major reservoirs on August 1 was at 33 per cent of the full reservoir level as compared with 45 per cent a year ago. Rainfall during the second half of the season (August-September) has been forecast to be normal by the India Meteorological Department (IMD).

Updates on NBFC and liquidity: Governor Shaktikanta Das said NBFC loans to MSME sector up to Rs 20 lakh will get priority status. He also assured sufficient liquidity to all needy sectors.

Experts’ take: K Joseph Thomas, Head of Research at Emkay Wealth Management, believes the RBI policy, especially the repo rate cut, takes cognizance of the need to bring down interest cost on liquidity and credit, to support the sluggish economic growth and to stimulate aggregate demand. The success of this accommodative policy would depend entirely on the next level of its application, that is, the transmission of the lower rates to the ultimate borrowers. The banks seem to be seized of this need and effective cascading of the benefits of lower base rate may happen over the next few months.

Next MPC meeting: The minutes of MPC’s meeting will be published by August 21, 2019 and the next meeting is scheduled for October 1-4.
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links

Follow us on

Download et app

Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service