RBI cuts rate by 25 bps to revive slackened growth, markets remain grim

Home and auto loans are set to become cheaper as the Reserve Bank of India (RBI) slashed the repo rate on Thursday by 25 basis points (bps) to 5.75 per cent.

The central bank also changed the monetary policy stance from ‘neutral’ to ‘accommodative’. The significance of such a move can be gauged by the fact that the RBI has reduced its growth forecast to 7 per cent in 2019-20 from 7.2 per cent.

The decision to reduce the repo rate was taken by the RBI's Monetary Policy Committee (MPC) at its second monetary policy review of the ongoing fiscal.

As per the monetary policy statement, the main considerations behind the MPC's decision were decline in private final consumption expenditure (PFCE) and moderation in exports.

Currently, high interest rates and liquidity constraints have demoralised auto, home and capital goods buyers. Even the high frequency indicators suggest moderation in activity in the service sector.

Accordingly, a lower repo, or short-term lending rate for commercial banks, will reduce interest cost on automobile and home loans, thereby ushering in growth.

"A sharp slowdown in investment activity along with continuing moderation in private consumption growth is a matter of concern. The headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts," the policy statement said.

"Hence, there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate," it said

This is the the third reduction in repo rate in 2019. The RBI had in April lowered its key lending rate by 25 bps to 6 per cent. Before that, in February, the MPC had voted to lower the repo rate by 25 bps to 6.25 per cent.

Additionally, RBI Governor Shaktikanta Das said that the central bank would make sure that the transmission of the reduced repo rate would be faster and higher.

In the absence of complete transmission of lower lending rates, consumers pay higher EMI while corporates' repayment burden remain high.

Despite the RBI cutting policy rate, banks have not adjusted their lending/deposit rate accordingly. On the contrary, a number of banks have raised their deposit rates to mobilise funds.

At the core of this mismatch between the RBI's action and the banks' inability to pass on the benefit to the borrowers is the slowdown in household savings. Increased government borrowing and elevated small savings rate have rendered deposit/investment mobilisation by banks/NBFCs expensive, the India Ratings report.

However, equity investors' were disappointed over the lower-than-expected rate cut.

At 1.30 p.m., the S&P BSE Sensex traded 369.89 points or 0.92 per cent lower at 39,713.65 points, while the NSE Nifty50 was down 112.20 points or 0.93 per cent at 11,909.45 points.

"Markets were disappointed over the fact that there were no immediate liquidity boosting measures that were announced. Though the RBI has constituted a working group on the same. Investors were also disappointed over the lower than expected rate cut and on the back of the DHFL default," Deepak Jasani, Head of Retail Research, HDFC Securities, said.

India's consumption demand is also still not a pronounced credit fuelled or leveraged demand. Outstanding personal loan (excluding housing loan)/PFCE (Private Final Consumption Expenditure) ratio was 35.7% in 4QFYE19 (28.2% at 1QFYE12).

GDP growth fell to a five-year low in FY19. Even on a quarterly basis, GDP witnessed a growth slowdown over 4QFY18-4QFY19, continuing the trend observed over 1QFY17-1QFY18. On the other hand, inflation is undershooting RBI's targeted 4% mark consecutively for nine months now.

With the softening of global crude oil prices and adequate food grain stock, there is clearly a scope for the RBI to announce at least a 25bp rate cut. This will be the third consecutive rate cut adding up to 75bp reduction in the policy rate so far in 2019, it said.