Home >Industry >Banking >RBI cuts repo rate by 35 basis points; maintains accommodative stance

The Reserve Bank of India’s (RBI) monetary policy committee (MPC) on Wednesday lowered its repo rate by an unconventional 35 basis points to 5.4%. This is the fourth reduction in a row of its key policy rate since Shaktikanta Das took over as the governor of the central bank in December last year.

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

The path of CPI inflation is now projected at 3.1% for the second quarter of FY20 and 3.5-3.7% for second half of FY20, with risks evenly balanced. Consumer price index (CPI) inflation for the first quarter of FY21 is projected at 3.6%. The MPC also revised downwards GDP growth for FY20 from 7% in the June policy to 6.9% in August in the range of 5.8-6.6% for the first half of FY20 and 7.3-7.5% for the second half–with risks somewhat tilted to the downside. GDP growth for the first quarter of FY21 is projected at 7.4%.

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The MPC said that inflation is currently projected to remain within the target over a 12-month ahead horizon.

“Since the last policy, domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish," it said.

The MPC added that even as past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap. Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate, it said.

The central bank also said that liquidity in the system was in large surplus in June-July 2019 due to return of currency to the banking system; drawdown of excess cash reserve ratio (CRR) balances by banks; open market operation (OMO) purchase auctions; and RBI’s foreign exchange market operations.

RBI said it absorbed liquidity of 51,710 crore in June, 1.30 trillion in July and 2.04 trillion in August (up to 6 August, 2019) on a daily net average basis under the LAF.

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