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RBI Slashes Repo Rate for 4th Time to Lift Sagging Economy as GDP Growth Forecast Dips Below 7%

Reserve Bank of India’s monetary policy committee (MPC) announced the decision on Tuesday.


Updated:August 7, 2019, 3:14 PM IST
RBI Slashes Repo Rate for 4th Time to Lift Sagging Economy as GDP Growth Forecast Dips Below 7%
Image for representation (Reuters)

New Delhi: The Reserve Bank of India (RBI), at the end of its fortnightly Monetary Policy Committee (MPC) meeting on Wednesday, reduced the repo rate by 35 basis points to 5.40 per cent. The central bank also revised the reverse repo rate to 5.15 per cent.

The MPC, headed by Shaktikanta Das, also cut GDP growth target to 6.9 per cent from 7 per cent for the ongoing financial year.

When asked why the RBI opted for a 35-basis point rate cut, Shaktikanta Das said it is not unprecedented, and added that a 25-basis point reduction was inadequate while 50 bps was excessive, so the MPC took a balanced call.

"The monetary policy committee was of the view that a 25 basis point rate cut was inadequate due to evolving global economic conditions while a 50 basis point cut would be excessive," he told reporters.

"Hence, 35 basis points was viewed as a balanced level of cut due to the current circumstances."

Out of the 6-member MPC, four voted in favour of a 35 bps cut in repo rate, RBI said in its policy statement. The MPC also decided to maintain its 'accommodative' stance of the monetary policy.

"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 RBI said in the third bi-monthly monetary policy review for the current financial year.

This is the fourth time in a row that the RBI has reduced the repo rate. In the earlier three policies, it has reduced the repo rate by 25 bps each.

Experts suggested that the cut in growth targets may be due to dwindling sales figures in the automobile industry, which is expected to persist over the next couple of quarters. Global implications of the US-China trade war are also expected to affect the estimation.

This comes in the backdrop of 3.18 per cent consumer price inflation, which is much below the RBI's medium term target of 4 per cent and gives the central bank room for a cut in policy repo rate to help banks lend at cheaper rates to consumers and investors, thus giving a leg-up to investment and demand both.

Core sector growth of 0.2 per cent in June gave the MPC another reason for a cut. Core sector comprises eight key infrastructure industries including power, steel, cement, petroleum products and crude oil. They are the best indicators of overall industrial production in the country.

So far in 2019, the repo rate has been cut thrice by 25 bps each, from 6.50 per cent to 6.25 per cent in February; 6.25 per cent to 6 per cent in April and from 6 per cent to 5.75 per cent in June.

Four MPC members -- Ravindra H Dholakia, Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das -- voted to reduce the policy repo rate by 35 basis points, while two members Chetan Ghate and PamiDua voted to reduce the policy repo rate by 25 bps.

The next meeting of the MPC is scheduled during October 1, 3 and 4, 2019.

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