Extending its rate cut spree into the fifth time in a row, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Friday slashed the repo rate by 25 basis points (bps) to 5.15 per cent. All loans, including home and car loans will be cheaper on account of this decision. It is a good news for common man during festive season.
Repo rate is the rate at which the central bank lends money to the commercial banks, in case of any shortfall in funds. Consequently, the reverse repo rate now stands at 4.9 per cent. Also, the central bank maintained its accommodative policy stance.
The six-member committee revised the GDP target for FY20 to 6.1 per cent from 6.9 per cent, earlier. Most analysts had expected the RBI to cut interest rates, although they were unsure of the quantum following an unconventional 35 basis-point easing last time.
While all 39 economists surveyed by Bloomberg News had expected a reduction, their forecasts varied from 15 basis points to 40 basis points. India, which is Asia’s third-largest economy, expanded by just 5 per cent in the June quarter, its slowest pace since 2013. That had raised expectations the RBI will be forced to further downgrade its growth projection of 6.9 per cent for the current fiscal year.
“At the margin, fiscal activism could be seen as reducing the burden on monetary policy to lift growth. However, given the limited growth and inflation impact of corporate tax cuts in the near term, we do not expect the monetary policy path to materially differ. In line with this assumption, we expect the RBI to reduce the policy repo rate by more than 25bp (we forecast up to 40bp repo rate cut to 5%), owing to a sharp reduction of growth forecasts, CPI inflation within the 4% target, and to give a push to credit demand ahead of the festive season (given banks have linked their lending rates to policy repo rates),” analysts at Nomura had written in the policy preview note.
The monetary policy expectation is not just limited to rate cuts. What’s perhaps more important at this stage is to ensure their quick transmission. While aggregate liquidity conditions have improved, transmission remains slow. The RBI’s assessment of the same will be critical. Apart from this, we would watch out for the central bank’s assessment of the NBFC situation and any regulatory developments thereof, Edelweiss Securities had said in a note dated September.