RBI slashes repo rate by 25 bps to 5.15%; maintains accommodative stance

04 Oct 2019 Evaluate

Extending its rate cut spree for fifth time in a row, the Reserve Bank of India (RBI), in its fourth bi-monthly monetary policy review of 2019-20, has slashed repo rate by 25 basis points (bps) to 5.15% from 5.40% with immediate effect, with an aim to boost to the ailing economic growth. It is lowest point since 2010. Consequently, the reverse repo rate under the LAF reduced to 4.90%, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40%. The monetary policy committee (MPC) of RBI also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

On the inflation front, the apex bank has revised the CPI inflation projection slightly upwards to 3.4% for second quarter of current fiscal (Q2FY20), while projections are retained at 3.5-3.7% for second half of FY20 (H2FY20) and 3.6% for Q1FY21. It said the outlook for food inflation has improved considerably since the August bi-monthly policy. Kharif production is estimated at close to last year’s level, auguring well for the overall food supply situation. It added that forward looking surveys conducted by the RBI point to weak demand conditions persisting, with indications of softening of output prices in Q3FY20. Accordingly, price pressures in CPI excluding food and fuel are likely to be muted. It also said crude oil prices may remain volatile in the near-term; while global demand is slowing down, the persisting geo-political uncertainties pose some upside risks to the inflation outlook.

On the economic growth front, the Central Bank has revised downwards real Gross Domestic Product (GDP) growth for current fiscal year (FY 2019-20) to 6.1% from 6.9% earlier. For Q2FY20 growth projection stand at 5.3% and it is in the range of 6.6-7.2% for H2FY20, with risks evenly balanced. Besides, GDP growth for Q1FY21 is also revised downwards to 7.2%. The RBI said GDP growth for Q1FY20 was significantly lower than projected. Various high frequency indicators suggest that domestic demand conditions have remained weak. The business expectations index of the RBI’s industrial outlook survey shows muted expansion in demand conditions in Q3. Export prospects have been impacted by slowing global growth and continuing trade tensions.

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