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RBI goes for 25 bps repo rate cut, 3rd in a row; shifts stance to 'accommodative'

The RBI press statement said all the six members voted in favour of a 25 bps rate cut.

, ETMarkets.com|
Updated: Jun 06, 2019, 07.00 PM IST
​Key RBI announcements: 25 bps rate cut, ATM charge review and no NEFT RTGS transaction charge
​Key RBI announcements: 25 bps rate cut, ATM charge review and no NEFT RTGS transaction charge
NEW DELHI: The Monetary Policy Committee (MPC) of the Reserve Bank of India on Thursday effected a 25 basis points cut in repo rate in its second bimonthly policy review of this financial year. After the cut, the repo rate now stands at 5.75 per cent, the lowest since July 2010.

The MPC also changed policy stance to 'accomodative' from 'neutral'.

Repo is the rate at which the central bank lends to commercial lenders, and the cut signalled a drop in cost of funds for corporates and individual borrowers though domestic banks have not been very efficient in quickly passing on the benefits of past rate cuts to their customers.

This was third rate cut in a row by the central bank, and the move was largely in line with Street expectations.

The RBI press statement said all the six members voted in favour of a 25 bps rate cut.

The committee has kept cash reserve ratio (CRR) unchanged at 4 per cent.

“The RBI policy decision is on the expected lines. The repo rate cut and the change of stance are key to supporting the sagging economic growth. The projected growth has been lowered to 7 per cent. But the policy has broad indications of more action on the liquidity front from the RBI in the coming days. This confirms the commitment of the central bank to better transmission of the rate cut effects through liquidity,” said Dr. Joseph Thomas, Head Research at Emkay Wealth Management.

The MPC noted that the growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April policy.

“A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern. The headline inflation trajectory remains below the target mandated to the MPC even after considering the expected transmission of the past two policy rate cuts,” MPC said in its statement.

The MPC, however, noted that there is scope 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.

The MPC has revised its GDP growth for FY20 downward to 7 per cent from 7.2 per cent in the April policy. In FY19, GDP growth stood at 6.8 per cent, which was lowest in five years.

The MPC sees growth in the range of 6.4-6.7 per cent in the first half of the financial year and 7.2-7.5 per cent in the second half, with risks evenly balanced.

"Weak global demand due to escalation in trade wars may further impact India’s exports and investment activity. Further, private consumption, especially in rural areas, has weakened in recent months. However, on the positive side, political stability, high capacity utilisation, the uptick in business expectations in Q2, buoyant stock market conditions and higher financial flows to the commercial sector augur well for investment activity," RBI statement suggested.

Markets and economists considered a rate cut crucial at this stage, as high-frequency data have been showing signs of distress in the economy.

India’s retail inflation has remained benign for some time now, clocking 2.9 per cent in April, which was well below RBI’s mandated target of 4 per cent. A slowdown in the domestic economy, as reflected in the sub-6 per cent GDP growth print for March quarter, provided a strong rationale for a policy rate cut, analysts said.

The rate cut could not lift stock indices. The stock barometer BSE Sensex fell 138.07 points, or 0.35 per cent, to 39945.47, while its NSE counterpart Nifty declined 66.05 points, or 0.55 per cent to 11,955.60. The 10-year sovereign bond yield dropped 1.35 per cent to 6.93 per cent. The rupee was ruling lower for the first time in four sessions. It fell 12 paise to 69.38 a dollar level.

In its April review, the MPC had emphasised the need to shift focus to growth, after having achieved price stability.

“The April print of core inflation at 4.6 per cent was significantly lower than a high of 6.2 per cent clocked in October 2018. It acted as a confirmation of low demand prevailing in the economy. Crude oil prices have fallen over 18 per cent from the April-end high of $75 to below $60 level, and it is likely to keep inflation under control in the coming quarters,” said Edelweiss Professional Investor Research.

March quarter saw fixed investments (gross fixed capital formation) grow by a meagre 3.6 per cent. "There is an urgent need in the economy to fuel investment by reducing cost of capital,” Edelweiss said in its policy preview.

Brokerages largely felt real interest rates were high at 3 per cent, which should be brought down to 1-2 per cent.

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