The Reserve Bank of India (RBI) on Thursday cut key policy rates by 25 basis points, the third consecutive time it has done so. The repo rate -- the key interest rate at which the RBI lends to the banks -- will now be 5.75%. The central bank has also changed its stance to ‘accommodative’ from ‘neutral’.
Most economists had expected a cut of 25 bps.
The rate cut decision came after the central bank’s Monetary Policy Committee (MPC) concluded its second bi-monthly monetary policy review for 2019-20. The decision of the rate cut was unanimous.
In a statement posted on the central bank’s website, the RBI said the MPC has noted that growth impulses weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy.
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The MPC revised both its growth and inflation forecasts for the current fiscal. GDP Growth has been revised downwards to 7% from the earlier projection of 7.2%. The MPC expects growth in the range of 6.4-6.7% in the first half of FY20 and 7.2-7.5% in the second half.
Consumer Price inflation forecast for the first half of fiscal year 2019-20 to 3-3.1% from 2.9-3% earlier, while the projection for the second half stands revised to 3.4-3.7% from 3.5-3.8% earlier
“Risks around the baseline inflation trajectory emanate from uncertainties relating to the monsoon, unseasonal spikes in vegetable prices, international fuel prices and their pass-through to domestic prices, geo-political tensions, financial market volatility and the fiscal scenario," the RBI policy statement said.
Headline retail inflation inched up by a mere 6 bps in April to 2.92%. While this was the highest inflation print in half a year, it was the ninth consecutive month in which the retail inflation, as reflected by the Consumer Price Index, had come in below the RBI's medium-term target of 4%.
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While inflation has given no worries to policymakers, the same can’t be said about the economic growth.
As per figures released Friday by the Central Statistics Office (CSO), GDP growth rate declined for the fourth consecutive quarter in Jan-Mar to come in at a 20-quarter low of 5.8%. The growth rate for the last financial year (2018-19) — 6.8% — was also a five-year low, coming in below the CSO’s second advance estimate of 7%.
Thursday’s rate cut comes even as most banks have failed to pass on the benefit of previous reductions amidst tight liquidity crunch.