RBI cuts repo rate by 25 basis points
The Reserve Bank of India on Friday cut the key repo rate by 25 basis points, from 5.40 per cent to 5.15 per cent. Reverse repo rate adjusted to 4.90 per cent and bank rate at 5.40 per cent, accordingly. The GDP outlook for 2019-20 has been revised to 6.1 per cent, from 6.9 per cent in the previous Monetary Policy committee meet. For 2020-21, the GDP outlook has been revised to 7.2 per cent.
This is the fifth straight cut in rates by the Reserve Bank in its key rates in as much policy reviews in 2019 and takes the total quantum of reductions to 1.35 per cent.
The decisions by the Reserve Bank of India are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent while supporting growth.
The RBI's decision comes after a three-day meet, in which several ways to complement the government's measures like reducing corporate tax and promoting credit offtake to spur economic activity during the festive season amid range-bound inflation, were discussed.
The RBI's repo rate cut comes as a boost to the ailing economic growth, as the traders will now focus on the wording and tone of the monetary policy statement for clues on further easing.
Since January, the Reserve Bank of India had already slashed the repo rate (short-term borrowing rate) four times, which aggregated it to 1.10 percentage points. Meanwhile, several analysts forecast one more cut of 15 bps in December.
"With current inflation remaining benign, we expect RBI to opt for a 40 bps rate cut at its policy review later this week in a bid to continue its support towards growth revival," said Yuvika Oberoi, an economist with Yes Bank in Mumbai.
Experts opined that another rate cut is on the cards as the government's hands are tied and the onus of taking initiatives now rests with the central bank.
According to a report with the PTI, the government has announced a series of measures including the steepest cut in corporate tax, the rollback of enhanced surcharge on Foreign Portfolio Investors, among others to jump-start growth which hit a six-year low of 5 per cent during the first quarter of the current fiscal.
At its last meeting in August, the Monetary Policy Committee (MPC) reduced the benchmark lending rate by an unusual 35 basis points to 5.40 per cent.
Friday's MPC meeting comes in the backdrop of RBI's mandate to banks to link their loan products to an external benchmark, like repo rate, for faster transmission of reduction in policy rates to borrowers, from October 1.
In a bid to revive business activity, the government in September had announced a sharp cut in the corporate tax rate—to 22 per cent from 30 per cent.
However, while the tax cut brings the cost of doing business in India into line with its main Asian rivals, the government’s move will do little to fix a lack of spending power, economists say.
“The recent volatility in crude oil prices and the fiscal measures announced by the government will have an impact on inflation in the medium-term and the fiscal deficit,” said Shanti Ekambaram, president of consumer banking at Kotak Mahindra Bank.
“Hence, expect the MPC to be more measured in its response with a rate cut of 20-25 bps,” she added.
Inflation in August accelerated to a 10-month high but remained well below the central bank’s medium-term target of 4 per cent for a 13th straight month.
Ahead of the meeting, the Das-headed Financial Stability and Development Council (FSDC) sub-committee took stock of the prevailing macroeconomic situation.
Earlier, the RBI Governor had said that the government has little fiscal space, giving hope that the central bank may provide more monetary stimulus to prop up the economy.
The government's fiscal space has been squeezed on account of cut in rates of corporate tax as well as lowering of GST rate on various goods. Revenue collection too has been below the Budget estimates.
Experts are of the opinion that another rate cut is on the cards as the government's hands are tied and the onus of taking initiatives now rests with the central bank.
Shanti Ekambaram, President, Consumer Banking, Kotak Mahindra Bank, said with inflation still within the RBI's medium-term target of 4 per cent, the MPC has the headroom to cut the repo rate further.
"However, the recent volatility in crude oil prices and the fiscal measures announced by the government will have an impact on inflation in the medium term and the fiscal deficit. Hence, we expect the MPC to be more measured in its response with a rate cut of 20-25 basis points in the October policy," she said.
"We continue to expect the RBI MPC to follow RBI Governor into another 'out-of-the-box' 35 basis points repo rate cut on October 4. This should send a strong signal for bank lending rate cuts with the 'busy' industrial season round the corner," BofA Merrill Lynch said in a report.
Retail inflation inched up to 3.21 per cent in August but remained within the RBI's comfort zone.
Experts and industry feel low inflation provides enough headroom for the RBI to further lower the policy rate, especially when the festive season has just started. People make huge purchases during Navratras and Diwali.
Economists also said the policy transmission process could improve after the RBI mandated banks to link all fresh loans to an external benchmark like the repo rate or the rate on short-term treasury bills since the start of this month.
India’s banks have passed only a small portion of the RBI’s cuts this year to their customers.
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