The Reserve Bank Wednesday slashed the repo rate for the fourth time in a row by an unprecedented 35 bps to cushion the rising headwinds to growth amidst softer inflation, and also lowered its growth forecast for the year by 10 bps to 6.9 percent.
The six-member rate-setting monetary policy committee also maintained the accommodative stance while going in a for an unconventional 35 bps reduction in the repo rate to 5.4 percent in a unanimous vote, which governor Shaktikanta Das described as a balanced act--neither inadequate or excessive.
With this, the RBI has reduced the repo rate by 110 bps since February. In the previous three monetary policies, the central bank had cut the repo rates by 25 bps each.
"The MPC judged that with inflation projected to remain within the target, addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture," Das told reporters after announcing the third bi-month monetary policy meeting of the year.
Das expressed confidence that the government will come up with more measures to revive the sagging growth, which dipped to a five-year low of 5.8 percent for the March quarter and is widely expected to slip further in the June quarter.
None of the macro-indicators have been promising since the past many months--plunging auto sales which hit a 20-year low in July, plummeting IIP growth which hit a 57-month low in June, falling exports and the continuing bloodbath in the markets, coupled with trade wars and increasing challenges to global economy all point to the gathering clouds.
The statement comes amidst a slew of industry leaders, including engineering giant L&T chairman AM Naik and Godrej Group chairman Adi Godrej have expressed disappointment on the economy and called for more measures to revive growth with faster decision making and ensuring communal harmony.
Of the six MPC members, four--Shaktikanta Das, Michael Patra (who is known for his hawkish stance), Bibhu Kanungo and Ravindra Dholakia voted for the steeper 35 bps cut, while the other two Chetan Ghate and Pami Dua, voted to reduce the policy repo rate by 25 bps.
Despite a more than expected rate cut, the markets reacted negatively with the Sensex tanking 0.77 percent after losing over 1.5 percent intra-day to a fresh low with the banking counters bearing the maximum brunt of the negative market sentiment.
The street was spooked by the falling rupee and the cut in the growth forecast by the central bank. Similarly, the rupee lost another 15 paise to close at 70.88 to the dollar. Das said the RBI has lowered its GDP growth projection by 10 bps to 6.9 percent for FY20, with more downside risks.
"Our understanding is that at this point it is a cyclical slowdown and not really a deep structural one. Nonetheless, we have to recognize there is room for certain structural reforms that need to be undertaken," Das said.
The rural demand in the form of two-wheeler and tractors sales and urban demand in the form of sales of passenger cars have slowed down, which is counter-cyclical, the governor said.
The RBI said its CPI inflation is projected remain 3.1 percent for Q2 and 3.5-3.7 percent for the second half.
Defending the steeper cut and an admission of the deepening slowdown, the governor said "these policy impulses have been transmitted through financial markets fully. The weighted average call money rates has declined by 78 bps, market repo rate by 73 bps and the 10-year benchmark G-secs yield by 102 bps. Banks, on the other hand, have reduced their interest rates on fresh rupee loans by only 29 bps so far. But he sounded confident of higher transmission in the weeks and months ahead.
He ruled out any cartilisation by banks by not passing on the benefits of the past repo rate cuts to borrowers.
Talking about the external benchmarking of lending rates, he said the discussion on the issue is continuing with the stakeholders and this is not the right time to do so as banks are struggling out of the bad loan mess.
On the liquidity front, Das said the central bank has injected liquidity into the system through LAF, OMOs and forex swap auctions and "there is abundance of liquidity" in the system currently, warranting "absorptions of surpluses by the RBI", the governor said.
Das said the RBI's policy rate cuts along with the measures taken by the government will ensure a situation where the system is surplus with liquidity.
"I think credit flow will now revive and the measures that we have taken today will augment the credit flow into the system. Therefore, growth numbers will pickup," he said.
Speaking on crisis in the parallel banking sector, Das said RBI has identified 50 large NBFCs, including some housing finance companies, and is monitoring them.
"It is our endeavour to ensure that there is no collapse of any large systematically NBFCs. We are monitoring the situation and we will see how it moves forward," he added.
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