RBI Cuts Repo Rate by 25 bps, Lowers 2019-20 GDP Outlook to 6.1%

The slashing of benchmark interest rate is also expected to revive the sagging economy.

Updated
Business
3 min read

The Reserve Bank of India cut the repo rate by 25 basis points to 5.15 percent on Friday, 4 October, saying the reduction is necessary to revive growth.

With the first quarter GDP growth plunging to 5 percent, the RBI cut its estimate of economic growth in the current fiscal to 6.1 percent from its earlier estimate of 6.9 percent.

Rates have now been cut by 135 basis points since the beginning of the year.

Meanwhile, the Central bank has maintained an accommodative policy stance with a view to revive growth while also ensuring that inflation remains within the target.

The repo rate, at which it lends to the system, has been brought down to 5.15 percent to help reduce borrowing costs for home as well as auto loans, which are now directly linked to this benchmark, reported PTI.

This is the fifth straight cut in rates by the Reserve Bank in its key rates in as many policy reviews in 2019, and takes the total to 1.35 percent.

On inflation, which is the key mandate of the RBI with the target of 4 percent in the medium term, the MPC moved up the September quarter expectations “slightly upwards” to 3.6 percent but retained its projection for the second half of this fiscal at 3.5-3.7 percent, PTI reported.

All six members of the Monetary Policy Committee voted for a rate cut. Five of them voted for a 25 basis point cut, while Ravindra Dholakia voted for a greaterr 40 basis point cut, according to BloombergQuint.

‘Govt Stimulus Measures to Strengthen Private Consumption’

On reviving growth, the MPC welcomed the recent moves by the government as the ones in right direction, but the resolution did not have any reference to fiscal deficit or fiscal management, which is generally deemed to have an inflationary impact, PTI reported.

“Government stimulus measures will help strengthen private consumption and spur private investments,” the monetary policy committee said.

Risks on the 6.1 percent GDP growth estimate are “evenly balanced”, it said.

On the farm sector, the MPC resolution said, “Prospects of agriculture have brightened considerably, positioning it favourably for regenerating employment and income, and the revival of domestic demand.”

The RBI also noted that the monetary policy transmission of the past actions has been “staggered and incomplete” and said that as against the cumulative reduction of 1.10 percent, banks have passed on only 0.29 percent to the borrowers, if we they to go by the weighted average lending rate.

On the regulation and supervision front, the RBI decided to increase the household limits for micro-lenders’ borrowers, and also raise the cap to Rs 1.25 lakh per eligible borrower from the previous Rs 1 lakh.

Finance Ministry, Niti Aayog Lauds Rate Cut

The Finance Ministry meanwhile said RBI’s decision to lower benchmark lending rate will complement recent measures taken by the government to accelerate growth.

Government has noted the reduction in repo rate from 5.40 percent to 5.15 percent announced by the Monetary Policy Committee (MPC) and believes that this will complement the recent measures taken by the government to accelerate growth, an official statement released by the Finance Ministry said.

Niti Aayog Vice Chairman Rajiv Kumar also said the RBI’s fifth consecutive rate cut reflects India's overall ambition to accelerate economic growth.

“Given all the work done in the last couple of months and today's RBI's fifth consecutive rate cut you can see that everything is focused now in accelerating growth further. And we do want to have this growth probably at 6.5 percent this year, which is lower than what we expect. We want it to go up to 8 percent sooner rather than later,” he said, speaking at a summit in Delhi.

(With inputs from PTI and BloombergQuint)

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