RBI policy LIVE | MPC cuts repo rate by 35 bps; lowers growth target

Reserve Bank of India has reduced the repo rate by unusual 35 basis points, in a bid to increase the transmission of rate to the customers. Stay tuned for live updates.

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The weighted average call money rate (WACR) – the operating target of monetary policy – was aligned with the policy repo rate in June, but it traded below the policy repo rate on a daily average basis by 14 bps in July and 17 bps in August.: Das

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Difference in quantum of rate cut

Four members of the committee (Ravindra H Dholakia, Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das) voted to reduce the policy repo rate by 35 basis points, while two members (Chetan Ghate and Pami Dua) voted to reduce the policy repo rate by 25 basis points.

Real GDP growth revised

"In the MPC’s June resolution, real GDP growth for 2019-20 was projected at 7.0 per cent – in the range of 6.4-6.7 per cent for H1:2019-20 and 7.2-7.5 per cent for H2 – with risks evenly balanced. Various highfrequency indicators suggest weakening of both domestic and external demand conditions. The Business Expectations Index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q2, although a decline in input costs augurs well for growth. The impact of monetary policy easing since February 2019 is also expected to support economic activity, going forward. Moreover, base effects will turn favourable in H2:2019-20. Taking into consideration the above factors, real GDP growth for 2019-20 is revised downwards from 7.0 per cent in the June policy to 6.9 per cent – in the range of 5.8-6.6 per cent for H1:2019-20 and 7.3- 5 7.5 per cent for H2 – with risks somewhat tilted to the downside; GDP growth for Q1:2020-21 is projected at 7.4 per cent," the MPC said.

"The transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last meeting of the MPC. Overall, banks reduced their WALR on fresh rupee loans by 29 bps during the current easing phase so far (February-June 2019)," the MPC said.

All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy.

Disheartening transmission

According to the data available with the RBI, the Marginal Cost of Funds based Lending Rate (MCLR) stand in the range of 8% to 8.40% during the month July 2019, 10-25 basis points (bps) higher than 7.9% to 8.05% interest rates prevalent a year ago.

Debate over liquidity

There has been a growing debate between the banks and RBI over the liquidity – availability of funds – in the financial system. The central bank, on its part, is of the contention that there is surplus liquidity of Rs 1 lakh crore in the system – which is enough for the transmitting the benefits of rate cuts to the end-users. Infact, the Reserve Bank Governor, Shaktikanta Das has been time and again, expressing his displeasure to the bank heads over the almost negligible transmission of the repo-rate benefits. On the other hand, the banks are of the contention that there is a liquidity position in the country isn’t sufficient for them to cut the lending rates.

Cut may give push to dip in housing sales

The Indian economy is going through testing times. What was initially being perceived as a sector-specific de-growth has now panned out to be an overall economic slowdown? The automobile and fast-moving consumer goods (FMCG) industries are in a slump, job markets are strained with increasing incidences of resizing and declining exports on the backdrop of a hostile global trade scenario are all indicators of the stalling economic growth in the country. A delayed monsoon this year may further worsen the situation as afflation is bound to impact food inflation and in turn, the overall inflation numbers. -

Shishir Baijal – Chairman & Managing Director, Knight Frank India

The numbers might push for cut

The subdued growth outlook goes in favour of a cut. A sluggish core sector growth of 0.2% in June gives the MPC another reason for a cut. Core sector comprises eight key infrastructure industries including power, steel, cement, petroleum products and crude oil.

So far in 2019, the repo rate has been cut thrice by 25 bps each, from 6.50% to 6.25% in February; 6.25% to 6% in April and from 6% to 5.75% in June.

Falling growth might be a concern

The decision also comes in the backdrop of a slowing economy and a tight fiscal stance by Finance Minister Nirmala Sitharaman, meaning thereby that the RBI is required to do the heavy-lifting to pump prime the economy. India's economic growth is expected to reduce further to 5.7% in the April-June quarter from a five-year low of 5.8% in January-March.

Announcement at in some time

The MPC's decisions will be announced at 11.45 am. A 25 bps cut will take the benchmark rate to its lowest since April 2010. It comes in the backdrop of 3.18% consumer price inflation, which is much below the RBI's medium-term target of 4% and gives the central bank room for a cut in policy repo rate to help banks lend at cheaper rates to consumers and investors, thus giving a leg-up to investment and demand both.

Another rate cut likely

There has been a growing debate between the banks and RBI over the liquidity – availability of funds in the system. The central bank, on its part, is of the view that there is surplus Rs 1 lakh crore liquidity in the system.

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