In a bid to augur economic activity amidst slowing consumption demand, the monetary policy committee of Reserve Bank of India on Wednesday unanimously decided to go for its fourth cut this year.
With a 35 basis point cut (highest this year) the repo rate, at which RBI lends to commercial banks, stood at a 9-year low of 5.4 per cent, since July 2010 when it was 5.25 per cent. The previous three cuts this year were 25 basis points each. Alongside a cut in the repo rate, the central bank also lowered its GDP growth projection from 7 per cent in June policy to 6.9 per cent now.
Why the rate cut?
While inflation is a key consideration for a rate cut and it provided RBI the comfort to go for a cut, the decision was also taken to boost aggregate demand especially private investment. The monetary policy statement said that “inflation is currently projected to remain within the target over a 12-month ahead horizon”.
The RBI statement further said that domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks.
It added that while private consumption, the mainstay of aggregate demand, and investment activity remain sluggish, 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,” said the RBI policy statement.
Why has GDP growth been revised downwards?
This is the second consecutive policy statement where the RBI has lowered its GDP growth projection for 2019-20. While in June statement it revised it projection downward from 7.2 per cent (stated in April 2019) to 7 per cent. This time it further revised the growth projection further down to 6.9 per cent.
The RBI said that “various high frequency indicators suggest weakening of both domestic and external demand conditions…business expectations Index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q2, although a decline in input costs augurs well for growth”. It said that the monetary policy easing since February 2019 is expected to support economic activity, going forward.