New Delhi: In an attempt aimed at lifting the sagging spirits of the Indian economy, the Reserve Bank of India (RBI) on Wednesday cut its key policy rate by 35 basis points (bps) to 5.40%.
This is the fourth straight cut by the central bank’s monetary policy committee (MPC) in 2019. While the announcement is in line with widespread expectations of a rate reduction, the RBI usually carries out changes in repo rates in multiples of 25 bps.
The ‘repo rate’ is the term given to the rate at which the RBI lends money to commercial banks in case of shortfall of funds.
The reverse repo rate now stands at 5.15%, with the central bank maintaining its accommodative stance, an indicator that more cuts may be in the offing.
“Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate,” the MPC said in a statement on Wednesday afternoon.
All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of the monetary policy, the statement noted.
The six-member MPC also lowered its FY20 GDP growth forecast to 6.9% from 7% earlier.
Most analyst and market expects had predicted that the RBI would cut rates to boost economic growth.
In fact, analysts at Bank of America Merrill Lynch (BofA-ML) had expected the central bank to slash rates by exactly 35 bps. Lending rate cuts, the research and brokerage outfit said, would become critical before the beginning of the festival season.
“Lending rate cuts are key to recovery. We expect the RBI MPC to follow Governor [Shaktikanta] Das into thinking ‘out-of-the-box’ to cut rates by 35 bp on August 7 from 25 bp earlier. While it cut 25 bp on June 6, less than our 35 bp call, the policy stance also shifted to accommodative,” wrote Indranil Sen Gupta, India economist at BofAML, in a policy expectation note.
In an August 2 report, Edelweiss Securities pointed out that the “entire responsibility” of reviving the Indian economy now “rests on the RBI’s shoulders”.
“Indian economy is in the throes of a broad-based slowdown — sharp contraction in auto sales, slowing investments and subdued exports. The problem is accentuated by high risk aversion prevailing in the financial sector. In this backdrop, we argue some form of a stimulus is required to kick-start the economy. The recent budget focused on fiscal consolidation and hence, the entire responsibility of reviving the economy now rests on the RBI’s shoulders,” analysts at Edelweiss Securities wrote in a report dated August 2.
The brokerage firm further said that the current macroeconomic environment warranted a 50 bps rate by the RBI.
The last time RBI made such consecutive cuts was after the global financial crisis over a decade ago, when most major central banks were desperate to revive economic growth, according to a recent Reuters report.
(With inputs from agencies)