Central bank cuts interest rates to the lowest in nine years, says it will maintain accommodative policy stance
RBI raised the lending cap for microfinance institutions to ₹1.25 lakh from ₹1 lakh
Mumbai: The Reserve Bank of India on Friday cut interest rates for the fifth time in a row in an attempt to give a renewed push to a slowing economy, and said it will maintain an accommodative policy stance until growth revives.
RBI lowered its repo rate—the rate at which banks borrow from it—by 25 basis points to 5.15%, in line with the forecast of bankers and economists surveyed by Mint. With this cut, the policy rates have come off by as much as 135 basis points so far this year to a nine-year low. The central bank will “continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target," RBI governor Shaktikanta Das said.
The rate cut was a unanimous decision by all the six members of the monetary policy committee (MPC), although Ravindra H. Dholakia voted for a steep 40-basis point cut.
RBI also sharply reduced its growth forecast for 2019-20 from 6.9% to 6.1%, with the committee noting that the negative output gap has widened further. “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," RBI said. In order to allow a wider range of recipients to be covered by this mode of financial inclusion, RBI also raised the lending cap for microfinance institutions to ₹1.25 lakh from ₹1 lakh.
According to Aditi Nayar, economist at Icra: “The MPC’s decision to retain the accommodative stance for as long as necessary to revive growth, is a strong signal that further rate cuts are not off the table. The upcoming GDP growth print for Q2 FY2020 is likely to crucially influence whether a sixth consecutive rate cut is announced in the December 2019 policy review, as well as the magnitude of the reduction."
Friday’s cut was mostly along expected lines, but some in the bond market expected a sharper rate action. “Today’s rate cut of 25bps by the RBI was short of our expectation of a front loaded cut of 40bps amid sharp downside revision of FY20 GDP growth forecast from 6.9% to 6.1%, which is reflective of further widening of the negative output gap," said Shubhada Rao, chief economist, Yes Bank.
“Markets sold off post-policy, as markets had already discounted a 25bps rate cut. Some market participants were expecting a steeper rate cut of 40bps (post an unconventional 35bps cut in Aug’19 policy), but their hopes were belied," said Avnish Jain, head, fixed income, Canara Robeco Asset Management Company.
That said, the market is expecting another 25-50 basis point cut, provided inflation remains below 4% for the financial year. RBI has retained its consumer price inflation forecast for the second half of the fiscal year 2019-20 at 3.5%-3.7%.
“We feel RBI may cut rates in the coming months by another 50 basis points as both domestic and international growth is weak and inflation expectations globally continues to be lower," said Murthy Nagarajan, head, fixed income, Tata Mutual Fund.
While the policy statement made no mention of the fiscal deficit outlook following the recent cut in corporate tax rates, Das said ,“We have no reason to doubt the commitment of the government to maintain the fiscal deficit number as given in the budget. Whatever shortfall is expected due to the announcement of corporate tax cut, government has the option of making it up through other sources."