RBI Cuts Repo Rate By 35 Bps to 5.40%
The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Wednesday cut repo rate by 35 basis points (bps) in its third bi-monthly policy review of the financial year. It was fourth rate cut by the central bank in a row. The short-term lending rate now stands at 5.40 per cent.
The MPC felt standard 25 bps rate cut might have been and 50 bps rate cut a bit excessive, RBI Governor Shaktikanta Das told reporters.
Four out of six committee members voted in favour of the 35 bps rate cut.
Persistent weakening of core inflation has kept the headline rate below the central bank’s 4 per cent target for the 11th straight month in June and, thus, the rate cut was largely in line with Street expectations.
RBI had cut the policy rate by 75 basis points prior to this, through three rate cuts of 25 bps each in February, April and June. Wednesday’s rate cut increased the tally to 110 basis points.
The central bank has maintained its accommodative stance on the policy. “The MPC felt it was prudent to remain accommodative,” Das said. “Understand that economic slowdown is cyclical and not deep structural slowdown,” Das told reporters.
The rate cut has sent a strong signal to domestic banks to cut lending rates before the busy festive season kicks off in September.
The RBI has cut GDP estimate to 6.9 per cent, adding that the risks to FY20 GDP forecasts have ‘somewhat tilted to the downside.’ Inflation (CPI) risk remained evenly balanced, the RBI said, anticipating October-March CPI inflation at 3.5-3.7 per cent.
“While we were hoping 50 bps rate cut, the RBI has chosen unconventional cut of 35 bps, which is mildly positive for the market. However, RBI cutting its estimation of GDP growth rate below 7 per cent, while widely expected, may not go down well with the market in short term,” said Rajiv Singh, CEO at Karvy Stock Broking.
Sensex jumped over 120 points in a knee-jerk reaction to the policy announcement, but failed to hold the gain and tanked to trade 160 points down within minutes.
“The 35 bps rate cut should be seen as a signal that the RBI MPC is quite concerned with the growth outlook beyond the usual 25 bps rate cut in a business-as-usual scenario (even though it does not reflect in the revised FY2020 GDP growth estimate), said Suvodeep Rakshit of Kotak Institutional Equities.
“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,” said K Joseph Thomas, Head Research at Emkay Wealth Management.
Analysts says a revival in monsoon has dampened agflation fears, as it halved seasonal rainfall deficit to 7 per cent of normal from 14 per cent on July 28. Besides, an escalation in the US-China trade war has raised growth risks. Various high-frequency indicators suggest the domestic slowdown may persist over the next couple of quarters, BofA-ML said in a note.
In addition, “Global rates are cycling down on the Fed’s July 31 rate cut. Oil and commodity prices are also slipping on global uncertainty. The domestic inflation outlook remains benign: we track July inflation at 3 per cent well within the RBI’s 2-6 per cent mandate,” the BofA-ML said.
The economy is facing significant domestic and external headwinds as accentuated by the various indicators such as growth of eight core industries decelerating to a four-year low; plunging sales in the automobile sector; the slackening of investment activity; and the likelihood of exports getting impacted due to the global economic slowdown, Centrum Broking said.
“India’s real interest rates still remain higher than most other countries, which is not beneficial for an economy experiencing slowdown,” it said before the RBI policy review.