RBI cuts lending rate by 0.25% to push growth

To give a boost to the sagging economy, the Reserve Bank of India Thursday lowered its benchmark lending rate to a nearly nine-year low of 5.75 per cent and changed its monetary policy stance to accommodative, leaving space for future rate cuts.

The third reduction in the benchmark lending rate or repo rate in the last five months is expected to bring down the EMIs on home and auto loans, and reduce the debt repayment burden on corporates. In all, the central bank has reduced the benchmark lending rate by 0.75 percentage point since February this year.

With the 0.25 percentage point cut Thursday, the repo rate, at which the central bank lends to the system, comes down to 5.75 per cent, as was widely expected. Earlier, the repo rate was at 5.75 per cent in July 2010.

 

Consequently, the reverse repo rate under the LAF stands adjusted to 5.50 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.0 per cent.

The six-member Monetary Policy Committee (MPC) also lowered its GDP growth forecast to 7 per cent for the current fiscal from 7.2 per cent earlier while marginally increasing its inflation projection to 3-3.1 per cent for the first half of 2019-20, which is within the comfort range of 2-6 per cent set by the government.

"The MPC notes that growth impulses have weakened significantly a sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern," the monetary policy resolution passed unanimously said.

"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. 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," second bi-monthly monetary policy added.

It noted that political stability, high capacity utilisation, buoyant stock markets, an uptick in business expectations in the second quarter and financial flows are positive from a growth perspective.

All the six members of the MPC voted unanimously in favour of a rate cut and also the change in the stance of the policy to "accommodative" from "neutral", which hints at more such rate cut actions in the offing.

"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent while supporting growth," it said.

It is to be noted that the GDP growth has moderated to a five-year low of 6.8 per cent for 2018-19 from 7.2 per cent in the previous fiscal.

The resolution made its disappointment clear at the transmission of rate cuts, saying the weighted average lending rate has gone down by only 0.21 per cent, while the same for older loans has increased 0.04 per cent, as against policy rate cuts of 0.50 percentage point.

The central bank also announced doing away with charges on fund transfers through RTGS and NEFT routes to boost digital transactions and asked banks to pass on the benefits to customers.