The Reserve Bank of India Thursday cut its repo rate, or the rate at which it lends to banks, by 25 basis points to 6 per cent — the second consecutive rate cut under new RBI governor Shaktikanta Das. The monetary policy committee of the RBI also decided to maintain the neutral monetary policy stance. The panel voted 4-2 in favour of the rate cut.
Besides, the RBI has also revised its GDP projection downwards for FY’20. While in the February policy, it had projected a GDP growth of 7.4 per cent for FY’20 — in the range of 7.2-7.4 per cent in H1, and 7.5 per cent in Q3, in the latest monetary policy statement it has been revised downwards to 7.2 per cent — in the range of 6.8-7.1 per cent in H1 and 7.3-7.4 per cent in H2.
RBI monetary policy review explained: Will the rate cut lead to lower loan rates?
Banks may be able to pass on the RBI’s rate cut to borrowers only to a limited extent, say analysts. Banks had only reduced their lending rates by under 10 basis points after the RBI’s last 25 bps cut in February. Deposit growth has come down sharply and banks are competing with another to attract depositors. Lower rates mean less deposit mobilisation
Why did the RBI revise the GDP growth downwards?
The central bank noted that there have some signs of weakening in the domestic investment activity and it is reflected in a slowdown in production and imports of capital goods. Further, a moderation of growth in the global economy might impact India’s exports. While these are the risks that have led the central bank to lower its projection, it however, pointed that higher financial flows to the commercial sector augur well for economic activity and private consumption, which has remained resilient, is also expected to get a fillip from public spending in rural areas and an increase in disposable incomes of households due to tax benefits.
Inflation worries flagged
The RBI has noted several uncertainties clouding its inflation outlook. “First, with the domestic and global demand-supply balance of key food items expected to remain favourable, the short-term outlook for food inflation remains benign. However, early reports suggest some probability of El Nino effects in 2019. There is also the risk of an abrupt reversal in vegetable prices, especially during the summer months,” it said. The RBI also noted that crude oil prices have risen around 10 per cent since the February policy.