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RBI slashes interest rate to 9-year low

‘Industry had expected an accommodative stance from RBI and today’s 25 bps cut in repo rate is a welcome move,’ said FICCI president Sandip Somany
New Delhi: The Reserve Bank of India (RBI) on Thursday announced a 25 basis points cut in repo rate in its second bimonthly policy review of financial year 2019-20, bringing the repo rate at its lowest in nine years — 5.75 percent. The news comes as the RBI’s Monetary Policy Committee (MPC) changed policy stance to ‘accomodative’ from ‘neutral.’

All six members voted in favour of 25 bps rate cut

An official statement released by the RBI said that all six members voted in favour of 25 bps rate cut. “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,” it said. The MPC also noted that the growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April policy. It added 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.

MPC revises GDP growth forecast to 7%

In the April policy, the MPC revised its GDP growth expectation for FY20 downward to 7 percent from 7.2 percent. In FY19, India clocked a GDP growth rate of 6.8 percent which was the slowest in the last five years. The MPC sees growth in the range of 6.4-6.7 percent in the first half of the financial year and 7.2-7.5 percent in the second half, with risks evenly balanced. It has kept the cash reserve ratio (CRR) unchanged at 4 percent.

What does the future look like?

“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.

What is Repo rate?

Repo is the rate at which the RBI lends to commercial lenders. The cut means a drop in the cost of funds for corporates and individual borrowers through domestic banks. Banks, however, have not been very efficient in quickly passing the benefits of rate cuts to their customers.

‘A welcome move’

Commenting on the monetary policy statement announced by RBI today, Sandip Somany, President, FICCI said, “With benign inflationary conditions and weakening economic growth, the industry had expected an accommodative stance from RBI and today’s 25 bps cut in repo rate is a welcome move. We further hope that this third consecutive rate cut in repo rate will lead to effective transmission, encouraging banks to lower their lending rates for both retail and corporate credit. As of date, the transmission has remained weak and ineffective largely due to tight liquidity conditions.”