RBI springs a surprise with 35 bps repo rate cut

The Reserve Bank of India became the world’s first central bank to hand out an unconventional 35 basis points policy interest rate cut in its Wednesday’s monetary policy, bringing down the repo rate to 5.40% and taking the market by surprise, which expected a little less.

It also cut India’s economic growth forecast to 6.9% for 2019-20 from 7% earlier and indicated that economic growth will be the priority for the central bank as it goes forward.

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The last time repo rate was lower than this was way back in April 2010, when it stood at 5.25%.

The RBI's MPC voted unanimously in favour of a rate cut, but the magnitude of cut was differed by the member. 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.

RBI Governor Shaktikanta Das said the rate cut comes amid a slowing global economic growth, increasing trade tensions and a volatile geo-political environment. He said inflation forecast in April-June was in alignment with RBI's June projection and therefore it was not revising the inflation forecast for 2019-20.

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.

With this, the reverse repo rate has also been revised to 5.15% from 5.65%.

RBI, which till now had changed repo rates by 25 bps and its multiples, has for first time slashed rate by 35 bps.

The central bank has maintained accommodative.

However, the bank has lowered the growth of the target to 6.9% from existing 7.0% for FY20. “Various high frequency 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.” The central bank said.

There has been an upward revision in the CPI inflation estimates as well. “CPI inflation is projected at 3.1% for Q2:2019-20 and 3.5-3.7% for H2:2019-20, with risks evenly balanced,” RBI said.