RBI Cuts Repo Rate to Lowest Level Since March 2010 as GDP Forecast Slashed to 6.1% From 6.9%

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Mumbai: The Reserve Bank of India on Friday cut interest rates for the fifth time this year to kickstart the languishing economy as it slashed the GDP growth projection for financial year 2019-20 to 6.1 per cent from the earlier forecast of 6.9 per cent.

The six-member monetary policy committee (MPC), led by Governor Shaktikanta Das, cut the repo rate by 25 basis points to 5.15% with all the members in agreement. The reverse repo rate was reduced to 4.9%.

This was the fifth consecutive rate cut effected by the Shaktikanta Das-led panel, and it was in addition to a cumulative 110 basis points rate cut that RBI has announced so far this year. The repo rate now stands at the lowest since March 2010.

The rate cut came much in line with expectations, as benign inflation expectations offered policymakers room to try and revive a slowing economy. The MPC maintained its "accommodative" stance and said it would maintain this position "as long as it is necessary" to revive growth, while ensuring inflation remains within target.

At its last meeting, the MPC reduced the benchmark lending rate by an unusual 35 basis points to 5.40 per cent to boost demand, but the measures have failed to have the desired effect so far.

The government has also announced a series of measures including steepest cut in corporate tax, rollback of enhanced surcharge on Foreign Portfolio Investors, among others to jump-start growth, which hit a six-year low of 5 per cent during the first quarter of the current fiscal.

Recently, Das had said he was “surprised” by the 5 per cent growth in GDP in the first quarter, which looked worse than expected. “We had projected 5.8 per cent and I think almost everybody had projected not below 5.5 or so. But the number of 5 per cent is a surprise,’’ he said.

The MPC in its August meeting had already trimmed the GDP growth forecast for this financial year to 6.9 per cent from 7 per cent with a downward bias. On Friday, GDP prediction for the first quarter of the upcoming financial year was also reduced to 7.2 per cent from 7.4 per cent.

Ahead of the meeting, the Das-headed Financial Stability and Development Council (FSDC) sub-committee took stock of the prevailing macroeconomic situation. Earlier, the RBI Governor had said that the government has little fiscal space, giving hope that the central bank may provide more monetary stimulus to prop up the economy.

The government's fiscal space has been squeezed on account of cut in rates of corporate tax as well as lowering of GST rate on various goods. Revenue collection too has been below the Budget estimates.

The MPC noted that private final consumption expenditure slowed down to an 18- quarter low. The statement also stated that growth in the services sector was stalled by construction activity.

“Overall, the prospects of agriculture have brightened considerably, positioning it favourably for regenerating employment and income, and the revival of domestic demand,” stated MPC.

Retail inflation in August accelerated to a 10-month high but remained well below the RBI's medium-term target of 4% for a 13th straight month.

A volatile global trade scenario and uncertain geopolitical environment, which led to the weakening of demand globally, are some of the other reasons favoured a rate cut.

Various high frequency indicators suggest that domestic demand conditions have remained weak, the RBI said in its policy statement. The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in the December quarter.