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RBI cuts repo rate by 25 basis points to 5.75 pc

Mumbai

For the third time in a row, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) today cut interest rates by 25 basis points, as was widely expected.

At the end of a three-day MPC meeting, RBI Governor Shaktikanta Das announced its second bi-monthly monetary policy statement for 2019-20. In a unanimous decision, the MPC also decided to change the stance of monetary policy from neutral to accommodative.

Amid slowing economic growth and rising global uncertainty, the RBI had decreased the short-term lending rate (repo rate) by 25 basis points each in its last two policy reviews.

Here are updates from RBI’s monetary policy:

RBI Governor Shaktikanta Das said they will ensure that adequate liquidity is there in the system

-“The change in stance and downgrading of growth forecasts suggest they are leaving the door open for further loosening,” said Shilan Shah, India economist at Capital Economics in Singapore. “I wouldn’t be surprised to see a further one or two cuts in the next six months.”

-Expressing concern on a sharp slowdown in investment activity along with a continuing moderation in private consumption growth, the MPC said growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy.

-“Interest rates on longer tenor money market instruments remained broadly aligned with the overnight WACR, reflecting near full transmission of the reduction in policy rate,” the RBI report said.

-On transmission of rate cuts, RBI noted that the transmission of cumulative reduction of 50 bps in the policy repo rate in February and April this year was 21 bps to the weighted average lending rate (WALR) on fresh rupee loans.

-Inflation expectations of households in the May 2019 round of Reserve Bank’s survey declined by 20 basis points for the three-month ahead horizon compared with the previous round, but remained unchanged for the one-year ahead horizon.

-RBI has revised consumer price inflation forecast for the first half of fiscal year 2019-20 to 3-3.1% from 2.9-3% earlier, while the projection for the second half stands revised to 3.4-3.7% from 3.5-3.8% earlier.

-The MPC revised both its growth and inflation forecasts for the current fiscal. GDP growth has been revised downwards to 7% from the earlier projection of 7.2%. The MPC expects growth in in the range of 6.4-6.7% in the first half of FY20 and 7.2-7.5% in the second half.

-All members of the MPC (Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Shaktikanta Das) unanimously decided to reduce the policy repo rate by 25 basis and change the stance of monetary policy from neutral to accommodative.

-The reverse repo rate under the LAF stands adjusted to 5.50%, and the marginal standing facility (MSF) rate and the Bank Rate to 6%.

-RBI said these decisions 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 benchmark equity indices Sensex and Nifty was trading negative since the beginning of the day as investors were cautious ahead of the RBI monetary policy. Sensex was down 150.69 points, or 0.38%, at 39,932.85 while the broader Nifty was trading at 11,955.30 falling 66.35%, or 0.55%.

-Even as the RBI has decreased the repo rate by 50 basis points to 6% since February, bank lending rates, on an average, have declined by only 5 basis points.

-Rating agency Icra expects the RBI to maintain a status quo in its monetary policy review. The agency said the central bank would adopt a wait and watch approach till the new finance minister Nirmala Sitharaman presents her first Budget on July 5.

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