RBI Repo rate cut by 25 points, affirms to remain accommodative to address growth issues

The Reserve Bank on Friday cut its benchmark lending rate by 0.25 per cent to revive growth that has hit six-year low of 5 per cent, and affirmed commitment to remain accommodative to address growth concerns 'as long as necessary'.

Highlights of the RBI's fourth bi-monthly monetary policy statement of 2019-20:

1. Repo rate or short-term lending rate reduced by 25 bps to 5.15%; It is the fifth rate-cut in 2019;
2. GDP growth forecast lowered for current fiscal to 6.1% from 6.9% earlier;
3. Retains retail inflation projection for second half of year at 3.5-3.7%;
4. RBI notes monetary transmission has been staggered and incomplete;
5. Foreign exchange reserves stood at USD 434.6 bn on Oct 1, up USD 21.7 bn over March-end 2019;
6. All members of rate-setting Monetary Policy Committee (MPC) voted for rate cut;
7. Next monetary policy review meet scheduled during December 3-5, 2019.
8. RBI continues with its accommodative monetary stance to revive economic growth;
9. Government stimulus measures to help strengthen private consumption and spur investments; Continuing slowdown warrants intensified efforts to restore growth momentum.

"The MPC (monetary policy committee) decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target," the resolution of the six-member panel headed by RBI Governor Shaktikanta Das said.

All the six members voted for a rate cut at the end of the three-day meeting, with Ravindra Dholakia voting for a 0.40 per cent reduction in rates.

On inflation, which is the key mandate of the RBI with the target of 4 per cent in the medium term, the MPC moved up the September quarter expectations "slightly upwards" to 3.6 per cent, but retained its projection for the second half of this fiscal at 3.5-3.7 per cent.

The half-yearly Monetary Policy Report presented along with the policy review suggested that inflation will remain within the target levels till early part of FY21.

On reviving growth, the MPC welcomed the recent moves by the government as the ones in right direction, but the resolution did not have any reference to fiscal deficit or fiscal management, which is generally deemed to have an inflationary impact.

"Several measures announced by the Government over the last two months are expected to revive sentiment and spur domestic demand, especially private consumption," it said.

Risks on the 6.1 per cent GDP growth estimate are "evenly balanced", it said.

On the farm sector, the MPC resolution said, "prospects of agriculture have brightened considerably, positioning it favourably for regenerating employment and income, and the revival of domestic demand".

The RBI also noted that the monetary policy transmission of the past actions has been "staggered and incomplete", and said that as against the cumulative reduction of 1.10 per cent, banks have passed on only 0.29 per cent to the borrowers, if we were to go by the weighted average lending rate.

Given the concerns on growth and inflation remaining within the target levels, a majority of analysts were expecting the RBI to cut rates at the review.

Despite the surge in the onion prices, the headline inflation for August had come at 3.8 per cent leading to expectations of a rate cut. Das had also recently said the prospect of benign inflation during the remainder of FY20 gives it the room to cut rates.

As the RBI has compelled banks to align all their retail loans to external benchmarks, and a majority of lenders have adopted the repo rate as the benchmark, the cut will likely bring cheer to borrowers.

On the regulation and supervision front, the RBI decided to increase the household limits for micro-lenders' borrowers, and also raise the cap to Rs 1.25 lakh per eligible borrower from the previous Rs 1 lakh.

RBI marginally revises up retail inflation forecast to 3.4% for Q2, but retains estimates for H2 at 3.5-3.7%

“Not aware of any demand for interim dividend. We have no reason to doubt govt commitment to meet fiscal target after tax giveaways. Banking system sound and stable, no reason to panic ,” RBI governor Das said.