RBI cuts growth forecast; economy gets cheap-loan push

Virtually admitting to a steep economic slump, the Reserve Bank of India (RBI) on Friday slashed the economic growth forecast for 2019-20 sharply, but lent support to kick-start the economy by making home, auto and personal loans cheaper, the second time in as many months.

While the economic growth forecast was cut by 80 basis points to 6.1%, the central bank’s key interest repo rate was reduced by 25 basis points to 5.15% after Friday’s move. Repo rate is the rate at which RBI lends to banks.

From October 1, the repo has been linked to banks’ lending rate, which will automatically make loans to customers cheaper each time the RBI decides to cut rates.

This is the fifth consecutive cut in repo rate by the central bank so far this year. At 5.15%, the repo rate is now at its lowest since March 2010, when it was brought down to 5% in the wake of global financial crisis.

The transmission of rates to end consumers has so far not been satisfactory, according to the RBI. A Dun and Bradstreet India data says that till July, only 50% of private sector banks had reduced lending rate post three rate cuts.

The decision by the monetary policy committee, which comes on the back of a deep slump in June-quarter GDP growth, left the policy stance “accommodative” for as long as it was necessary to revive economic growth.

This means the central bank will not shy away from giving any number of rate cuts until the economy looks up, provided inflation remains under control.

India’s economy expanded a meagre 5% in April-June quarter. “The accommodative stance will continue,” RBI Governor Shaktikanta Das said at a post-policy press conference.

“While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum,” the monetary policy statement said, lending support to Das’ remark. Benchmark indices slipped into the negative territory soon after the RBI lowered growth projections.

The government took note of the revised growth projections but said the step to cut repo rate will compliment its efforts to accelerate growth.

BSE Sensex plunged 434 points, rate sensitive banking and auto stocks remained the major losers. Nifty gave away close to 140 points.

While lowering the growth forecast sharply, Das did not flag concerns on the Centre’s fiscal deficit which, economists feared, could be breached by a high margin after the recent corporation tax cut which amounted to Rs 1.45 crore of revenue loss.

To a question whether the recent corporate rate cuts and a 19-month lower
Goods and Services Tax collection posed a risk to the Centre’s fiscal deficit, Das said
he had no reason to doubt the government’s commitment after it made a statement that it would adhere to the target.

To a barrage of questions on whether the RBI was caught napping on the recent default by the Punjab and Maharashtra Bank (PMC), Das said one incident at the cooperative bank should not be used to generalise the health of India’s banking system which “remained sound and stable”.