The Monetary Policy Commitee (MPC) of the Reserve Bank of India on Thursday slashed the repo rate by 25 bps (basis points) in its second bimonthly policy review of this financial year following which the growth in the Gross Domestic Product (GDP) moderated to a 21-quarter low. The repo rate now stands at 5.75 per cent and the MPC also changed its stance from accomodative to neutral. This was the third rate cut in a row and is seen largely on expected lines.
The central bank’s press statement read that all six members voted in favour of a 25 bps rate cut, while the MPC has kept cash reserve ratio (CRR) unchanged at 4 per cent. In its official notification the RBI said the headline 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 would be no scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demands and in particular, reinvigorate private investment activity while remaining consistent with its flexible inflation targeting mandate.
The MPC observed a sharp slowdown in investment activity along with a continuing moderation in private consumption growth and hence the rate cut. It also revised its GDP growth for FY20 downward to 7 per cent from 7.2 per cent in the April policy. In FY19, the growth stood at 6.8 per cent, which was lowest in five years.
RBI statement also read that weak global demand due to escalation in trade wars might further impact India’s exports and investment activity. Further, private consumption, especially in rural areas, has weakened in recent months. An RBI official reiterating the move said the decision was largely in line with Street expectations. He said 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 will manifest better transmission of the rate cut effects through liquidity, added the official.
Repo is the rate at which the central bank lends to commercial lenders and the current rate-cut signaled 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.