RBI cuts Short-Term Lending rate (repo rate ) by 25 Basis Points
Reserve Bank of India cuts policy repo rate by 25 basis points, this is the third rate cut in a row, and the central bank has also shifted its stance from neutral to accommodative.
MPC has voted unanimously to cut repo rate by 25 basis points. The RBI Governor also alluded to the fact that GDP data put out by National Statistics Office on 31 May 2019 reflected a sharp deceleration in growth to five year low of 5.8% in Q4 of the fiscal year 2018-2019. MPC also highlighted the reduction both in agriculture and allied activities. Also, manufacturing growth contracted dramatically. The MPC has revised its GDP growth for FY20 downward to 7 percent from 7.2 percent in the April policy.
India’s retail inflation has remained benign for some time now, clocking 2.9 percent in April, which was well below the RBI’s mandated target of 4 percent. A slowdown in the domestic economy, as reflected in the sub-6 percent GDP growth print for March quarter, provided a strong rationale for a policy rate cut, analysts said. The MPC sees growth in the range of 6.4-6.7 percent in the first half of the financial year and 7.2-7.5 percent in the second half, with risks evenly balanced.
On the global front, the RBI Governor mentioned that the trade war between USA and China poses significant headwinds to the global economy. The Weak global demand is going to weigh down negatively on Indian exports, which is still reeling under pressure. Globally, we have a situation where countries starting from the USA adopted a protectionist approach, which is totally against the very spirit of multilateralism.
MPC also noted that CPI (consumer price index) inflation was unchanged from its March level of 2.9 %. Items excluding food and fuel offset a high increase in food and fuel groups, Governor said in his statement.
- The construction sector, which is the largest employer within the Indian economy, has shown a massive slowdown in its activities.
- In addition to this, growth of eight core sectors has also decelerated sharply.
- Credit offtake from banks too big businesses have strengthened but remained muted for MSME’s.
- Capacity utilization in the manufacturing sector has declined from 75.8% in Q3 to 75.2% Q4.
- Import of capital goods, which is an indicator of investment activity, has been anemic in April.
- High-frequency data indicates moderation in the services sector.
- Output gap has widened, which has reflected that the economy grew well below its potential.
- Liquidity condition has improved and now entered into the surplus territory.
- (The RBI has set a working group to comprehensively review the liquidity condition and suggest measures to simplify current liquidity management framework. The group is expected to submit its report by mid-July 2019)
- The committee has kept cash reserve ratio (CRR) unchanged at 4 percent.
- RBI has decided to remove charges on RTGS( Real Time Gross Settlement System) and NEFT(National Electronic Fund Transfer).
- By taking into consideration all the aspects of the Indian economy, RBI’s decision to reduce repo rate by 25 basis points is a window of opportunity. After the cut, the repo rate now stands at 5.75 percent, the lowest since July 2010.