RBI cuts interest rates by 25 bps to 5.75% third time this year to boost growth; changes stance to accommodative

Slashing benchmark lending rates for the third time this year, the Reserve Bank of India cut its repo rate by 0.25 percent Thursday and said its future monetary policy stance will be more accommodative

Press Trust of India June 06, 2019 12:27:42 IST
RBI cuts interest rates by 25 bps to 5.75% third time this year to boost growth; changes stance to accommodative
  • Amid concerns of a slow down in the economy, the central bank lowered its gross domestic product (GDP) forecast to 7 percent for the current fiscal from 7.2 percent projected earlier

  • It has marginally increased its inflation projection to 3-3.1 percent for the first half of the fiscal year 2019-20

  • The repo rate, at which the central bank lends to the system, will come down to 5.75 percent after the cut

Mumbai: To give a boost to the sagging economy, the Reserve Bank of India on Thursday lowered its benchmark lending rate to a nearly nine-year low of 5.75 percent 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 on Thursday, the repo rate, at which the central bank lends to the system, comes down to 5.75 percent, as was widely expected. Earlier, the repo rate was at 5.75 percent in July 2010.

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

RBI cuts interest rates by 25 bps to 575 third time this year to boost growth changes stance to accommodative

File image of RBI. AFP

The six-member Monetary Policy Committee (MPC) also lowered its GDP growth forecast to 7 percent for the current fiscal from 7.2 percent earlier while marginally increasing its inflation projection to 3-3.1 percent for the first half of 2019-20, which is within the comfort range of 2-6 percent 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 percent within a band of +/- 2 percent while supporting growth," it said.

It is to be noted that the GDP growth has moderated to a five-year low of 6.8 percent for 2018-19 from 7.2 percent 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 percent, while the same for older loans has increased 0.04 percent, 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.

Updated Date:

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