The Reserve Bank of India’s monetary policy committee (MPC) expectedly reduced its benchmark repo rate for the fourth straight time, but went beyond the conventional quarter per cent cut to instead cut it by 35 basis points (0.35 per cent), signalling its concerns over a slowing economy.
Post Wednesday’s cut, the benchmark rate at which the central bank lends to commercial banks will now stand at 5.40 per cent, which is the lowest level in almost nine years.
India’s economic growth has slowed sharply over the past few quarters, with the GDP in January-March slipping to 5.8 per cent. Vehicle sales have slumped, partly due to rising cost of ownership and also due to a liquidity crunch in the non-banking financial services sector, which accounts for a large chunk of financing of automobiles. A slump in rural demand has also led to a slower volume growth for fast moving consumer goods makers.
At the same time, there are downside risks to global growth too. Recently, the US Federal Reserve cut interest rates by 25 bps amid rising recession worries.
RBI cut its GDP growth forecast for the financial year ending March 2020 to 6.9 per cent from 7 per cent, and is hopeful that the rate cut will help in a revival. So, while, first half GDP growth has been cut sharply to a range of 5.8 per cent to 6.6 per cent, versus 6.4 per cent to 6.7 per cent it had expected earlier, in the second half it is expecting growth to pick up to 7.3 per cent to 7.5 per cent range, with risks tilted to the downside.
The downward adjustment in GDP growth projection was warranted by various high frequency indicators pointing to weakening of both domestic and external demand conditions, said Shaktikanta Das, governor of RBI, who added that the impact of monetary policy easing since February 2019 should support economic activity going forward.
“Considering the evolving macro-economic outlook, the Reserve Bank has been preemptive in its monetary policy actions and stance. In today’s meeting, the MPC judged that with inflation projected to remain within target, addressing growth concerns and boosting aggregate demand, especially private investment, assumes the highest priority at this juncture,” said Das.
The central bank sees retail inflation at 3.1 per cent in the July-September quarter and in the 3.5 per cent to 3.7 per cent range in the second half of the year.
“The sluggish global economy, the fact that world over central bankers are easing rates and of course our economy also faces growth headwinds were among the key reasons that can be attributed to the rate cut,” said Lakshmi Iyer, chief investment officer, debt at Kotak Mahindra Asset Management.
With inflation set to remain well within RBI’s mandated range of 4 per cent, plus or minus 2 per cent, economists see a further scope of rate reduction this year, more so if the economy fails to pick up.
“The 35 bps rate cut should be seen as a signal that the RBI MPC is quite concerned with growth outlook beyond the usual 25 bps rate cut in a business-as-usual scenario. With inflation expected to remain benign, and further downside to growth outlook, we see scope for 25-50 bps of further rate cuts through FY2020,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.
Anagha Deodhar, economist at ICICI Securities also believes that a 25 bps rate cut would have been inadequate in the current scenario, while a 50bps cut would have been too aggressive.
“Inflation and growth are likely to pickup in the second half of FY20, hence we believe there is room to cut rate only once more in this fiscal year,” said Deodhar.
Ratings agency CARE also sees RBI cutting repo rate by a further 25-50 bps in the current financial year.
Including Wednesday’s cut, RBI has reduced repo rate by 110bps (1.10 per cent) since February 2019, which should benefit demand in interest-sensitive sectors, mainly, real estate, automobiles and consumer durables, said, Arun Thukral, MD and CEO of Axis Securities.
However, much will depend on how much of the reduced interest rate will be transmitted by commercial banks in the form of lower deposit and lending rates.
Das said that following the 75 bps rate cut in the past three MPC meets, banks had reduced rates on fresh loans by only 29 bps. He said that the RBI would take whatever steps required to ensure effective transmission of interest rates.
“Our interactions with various stakeholders including both public and private sector banks, indicate that steps are being taken by them on an ongoing basis to progressively lower their interest rates so that the benefits of policy rate reductions are passed on to the economy. Accordingly, we expect higher transmission of monetary policy action by banks in weeks and months added,” he said.
He added that the central bank was monitoring the situation and would take whatever steps required to ensure better transmission of rates.
Following the RBI repo rate cut, State Bank of India, the country’s largest lender, announced a cut in its lending rates across tenures by 15 basis points.
The one year marginal cost of funds-based lending rate (MCLR) would thus come down to 8.25 per cent from 8.40 per cent effective August 10. This is the fourth consecutive cut in MCLR in the current financial year, SBI said.
SBI’s repo-linked lending rate (RLLR) for CC/OD (cash credit/over draft) customers will stand revised to 7.65 per cent effective September 1, it added.
“The RBI decision to cut repo rates by an unconventional 35 bps is perhaps a recognition that monetary policy works best with unanticipated surprises to market. The RBI has unveiled a host of bazooka measures to arrest the recent growth pangs,” said Rajnish Kumar, chairman of SBI.
Other banks could also follow suit and cut their interest rates in the coming days.
Earlier on Monday, after delivering the Lalit Doshi memorial lecture in Mumbai, Uday Kotak, the founder of Kotak Mahindra Bank had said that there will be further reduction in interest rates over the next 20-30 days.
