October 5, 2019 4:50:24 am
Slashing the growth estimate to 6.1% for 2019-20 from the 6.9% forecast in August, the Reserve Bank of India (RBI) Friday reduced its key policy rate by 25 basis points noting that the “continuing slowdown warrants intensified efforts to restore the growth momentum”. The repo rate — the rate at which RBI lends money to banks — now stands at 5.15%, and is the lowest since March 2010.
The benchmark Sensex slumped by 434 points to 37,673.31, reacting to RBI’s bigger-than-expected 80 basis points cut in the GDP growth forecast.
Recommending the fifth consecutive rate cut — cumulatively 135 points — in calendar year 2019, the RBI’s Monetary Policy Committee has maintained it would continue with the “accommodative stance” as long as it is necessary to “revive growth”.
Friday’s cut will push banks to cut rates on certains loans and deposits since RBI had already directed them to link their interest rates to a benchmark rate like the Repo rate. The fifth consecutive cut this year by the RBI has brought down the Repo rate — the rate at which the RBI lends funds to banks – by 135 basis points from 6.50 per cent in 2019.
“With inflation expected to remain below target in the remaining period of 2019-20 and the first quarter of 2020-21, there is policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate,” RBI Governor Shaktikanta Das said, unveiling the fourth bi-monthly monetary policy statement.
Das said various high frequency indicators suggest that domestic demand conditions have remained weak. The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in the third quarter. Export prospects have been impacted by slowing global growth and continuing trade tensions. “It is in this context that the MPC decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target,” Das said.
According to him, the slump in real GDP growth to 5% in 2019-20 Q1 has been followed by generally weaker high frequency indicators for the second quarter. “Industrial production was lower in July 2019 on a year-on-year basis, pulled down mainly by manufacturing. The production of capital goods and consumer durables contracted. The output of eight core industries contracted in August, with the production of coal, electricity, crude oil and cement decelerating or going into contraction,” he said.
The manufacturing PMI Index for September 2019 was flat, though still in expansion zone, he said. High frequency indicators suggest that services sector activity weakened in July-August. “Indicators of rural and urban demand continued to slow down in July-August. The Reserve Bank’s consumer confidence survey also shows weak consumer sentiment, especially relating to non-essential items,” Das said.
Taking into consideration these factors, Das said, “real GDP growth for 2019-20 is revised downwards from 6.9 per cent in the August policy to 6.1 per cent – 5.3 per cent in the second quarter of 2019-20 and in the range of 6.6-7.2 per cent for the second half of 2019-20 – with risks evenly balanced; GDP growth for the first quarter of 2020-21 is also revised downwards to 7.2 per cent.”
The RBI rate cut has come at a time when global economic activity has weakened further. Heightened uncertainty emanating from trade and geo-political tensions continues to cloud the outlook. Among advanced economies, the slowdown in the US economy in the second quarter of 2019 appears to have extended into the third quarter, with the US Fed last month delivering its second rate cut in a row.
On the positive side, the impact of monetary policy easing since February 2019 is gradually expected to feed into the real economy and boost demand, Das said. “Several measures announced by the Government over the last two months are expected to revive sentiment and spur domestic demand, especially private consumption,” he said.
“With policy space available on account of inflation expected to remain below target in the remaining period of 2019-20 and the first quarter of 2020-21, the MPC decided to reduce the policy rate by 25 basis points and continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target,” the RBI said.
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