RBI cuts repo rate by 25 bps to 6%

Repo rate is the key interest rate at which the RBI lends short-term funds to commercial banks.

Mumbai: As widely expected, the Reserve Bank of India (RBI), in its first bi-monthly monetary policy for the financial year 2019-20, cut the repo rate by 25 basis points, or 0.25 per cent, to 6 per cent to stimulate economic growth. Thursday’s rate cut is the second consecutive rate cut by the central bank in 2019, bringing the total reduction in policy rates to 50 basis points in the ongoing rate easing cycle. However, bankers remained non-committal on passing on these rate cuts to the end borrowers.

The central bank also revised downwards the projections for economic growth to 7.2 per cent and inflation to 2.4 per cent and most economists now expect the RBI to cut rates again by 25-50 bps during the year.

Repo rate is the key interest rate at which the RBI lends short-term funds to commercial banks.

Sunil Mehta, MD and CEO of Punjab National Bank, said, “Banks have transmitted the rate reduction to the tune of 10 to 12 basis points. Going forward, with this additional cut and improvement in the liquidity position, banks would take a call on further transmission.”

Four out of the six members of the Monetary Policy Committee voted in favour of a 25 basis points cut while the other two voted to keep the rate unchanged. Five members voted for keeping policy stance at ‘neutral’; one voted for change to “accommodative”.

“To summarise, global growth is slowing down, and this is also reflected in three successive downward revisions made by the IMF in its projection of global growth for 2019. Domestic GDP growth is also estimated to slow in 2018-19, with high frequency indicators suggesting slackening of urban and rural demand as well as investment activity. Growth projections for 2019-20 have accordingly been revised downwards from 7.4 per cent to 7.2 per cent,” the RBI governor Shaktikanta Das said while reading out his statement in the policy press conference.

The RBI said that it expects economic growth to be in the range of 6.8-7.1 per cent in the first half of the current financial year, and in the range of 7.3-7.4 per cent in the second half with "risks evenly balanced". Inflation is likely to remain benign in the short term, it noted. Assuming a normal monsoon in 2019, the RBI lowered its CPI inflation projection to 2.4 per cent in the fourth quarter of 2018-19 from 2.8 per cent.

For the first half of the current financial year, which began on April 1, the central bank expects inflation at 2.9-3.0 per cent, and 3.5-3.8 per cent in the second half with risks broadly balanced. At the same time, it did acknowledge the monsoon risk from El Nino conditions and highlighted ambiguity in oil price movement.

“We now expect that the RBI is likely to further cut rates in June by 25 bps rather than in August as weak growth numbers could force a frontloaded policy support,” said Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India.

Anil Gupta, Sector Head-Financial Sector Ratings at ICRA, said, “We believe that despite an additional cut in policy rates, the transmission in banks’ lending rate will remain incomplete as the incremental build-up in their deposits continues to lag the credit growth and the interest rates on small savings continue at elevated levels. Improvement in the systemic liquidity conditions will remain the key driver for improving bank’s ability to effect cut in their lending rates.”

“No substantial relief is expected for borrowers in their monthly loan installments as banks are unlikely to induce a large cut in their benchmark lending rates” added Gupta.

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