Business Economy

RBI cuts repo rate to 6%, lowers GDP forecast to 7.2%

The monetary policy committee of the Reserve Bank of India (RBI) for the second consecutive time cut the benchmark lending rate by 25 basis points to 6% on Thursday. It cited concerns over growth as it lowered the GDP forecast to 7.2% for the current financial year from 7.4% projected in the February policy.

The central bank said the output gap remained negative and the domestic economy was facing headwinds, especially on the global front. (Output gap refers to the difference between the actual output of the economy and its maximum potential.) “The need is to strengthen domestic growth impulses by spurring private investment that has remained sluggish,” it said.

Four members of the committee voted for a rate cut, while RBI Deputy Governor Viral Acharya and Chetan Ghate voted for status quo.

The committee maintained the neutral policy stance, which means interest rates can move in either direction. “With the inflation outlook remaining benign, the RBI will address the challenges to sustained growth of the economy while ensuring price stability on an enduring basis,” Governor Shaktikanta Das said.

The RBI lowered its inflation forecast to 2.9%-3% from 3.2%-3.4% for the first half of the current financial year and 3.5-3.8% in the second half, assuming a normal monsoon. “Domestic GDP growth is also estimated to slow in 2018-19, with high frequency indicators suggesting slackening of urban and rural demand as well as investment activity,” he said.

Bond traders, however, were not impressed with the 25 bps rate cut as they were expecting a higher quantum to address growth headwinds and deficit liquidity. The yield on the 10 year benchmark bond hardened from 7.27% to 7.35%.

“Markets were perhaps anticipating a relatively high degree of dovishness from the policy statement which hasn’t materialised,” HDFC Bank said in a note to its clients.

Hoping for more

Economists said there is still scope for further rate reduction. “We expect another rate cut, with June as our base case. An argument for the cut to be delayed to August is equally strong if the RBI sees reason in factoring in the full-year budget due in July and awaits a clearer picture on monsoon developments,” said Radhika Rao, Economist, DBS Bank.

The Governor expressed concern over monetary transmission, while noting banks have only reduced lending rate by 10 bps after RBI reduced the policy rate by 25 bps in February. “More needs to be done.”

The State Bank of India, the country’s largest lender, said the marginal cost of fund-based lending rate (MCLR), which is the benchmark rate, can go down by 7-10 bps. “We have already announced a framework that we will link some products with the policy rate. So that transmission will happen through the linking that we have already announced,” P.K. Gupta, managing director, SBI told The Hindu.

“As we said whereever there is direct linking (with repo rate) the full pass through will happen. And wherever the linking is through MCLR, we believe 7-10 bps MCLR will go down. Our ALCO (asset-liability committee) will meet and take a call,” Mr. Gupta said.

SBI had linked savings bank rate (for over ₹1 lakh deposit) and some short term loans with repo rate, with effect from May 1. The current savings bank rate of 3.5% was linked to a repo rate of 6.25%, so now with 25 reduction in the repo rate, savings bank rate (for ₹1 lakh) will become 3.25% from May 1.

Highlights

* Short-term lending rate (repo) reduced by 25 basis points to 6 per cent

* This is second back-to-back rate cut

* RBI maintains Neutral stance on the monetary policy

* Four out of six MPC members voted in favour of rate cut

* GDP growth projection lowered to 7.2 per cent for 2019-20

* RBI revises downward retail inflation estimate to 2.4 per cent in Q4 FY19.

* MPC notes output gap remains negative and domestic economy facing headwinds

* Next monetary policy statement on June 6.

Source: thehindu.com

Leave a Reply

Your email address will not be published. Required fields are marked *