The Reserve Bank of India (RBI) on Wednesday cut repo rate by 35 basis points from 5.75 per cent to 5.40 per cent. As a result, the reverse repo rate has been revised to 5.15 per cent, while the marginal standing facility (MSF) rate and the bank rate stand at 5.65 per cent.
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The decision was announced after the three-day Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, concluded on Wednesday. The RBI also decided to maintain the accommodative stance of monetary policy.
The RBI pegged retail (CPI) inflation at 3.1 per cent in the second quarter and in the 3.5-3.7 per cent range in the second half of the year. The central bank has also slashed the GDP growth forecast to 6.9 per cent from 7 per cent for 2019-2020.
Noting that inflation is currently projected to remain within the target over a 12-month ahead horizon, the MPC said since the last (June) policy, domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks.
It said that even as the past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap.
Gaurav Chopra, Founder & CEO, IndiaLends, said the success of the rate cut depend on how banks and NBFCs would pass on the rate reduction to end consumers.
"RBI went for a larger-than-expected interest rate cut of 35 basis point for the first time since April 2012 taking the repo rate to a nearly a nine-year low at 5.40 per cent. This move comes at a time when global economic activity has slowed down and geo-political uncertainty have become two of the major concerns for the nation. This is a welcome move as it will give a boost to the economy and retail lending sector. The success of this move will depend largely on banks and NBFCs’ decision to pass on the rate cut to end consumers thereby making loans cheaper for them. RBI's decision to reduce the risk weight for personal loans to 100 per cent from 125 per cent will further boost retail lending as this move will allow banks to reduce their interest rates for personal loans," Chopra said.
The decision to reduce the lending rates and maintain the accommodative monetary policy stance was taken after all the members of the MPC unanimously voted in favour. While four members—Ravindra H. Dholakia, Michael Debabrata Patra, Bibhu Prasad Kanungo and governor Das—voted to reduce the policy repo rate by 35 basis points, two members, namely Chetan Ghate and Pami Dua, wanted only a 25 basis points cut.
The central bank has already reduced the repo rate three times in the last as many MPC meetings. In its June policy review, while reducing the rate for the third time in a row, the RBI had signalled more easing as it looked to support an economy growing at the slowest pace since the BJP first came to power in 2014.
