The Six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) revealed the fourth bi-monthly policy review on Friday. The RBI slashed the repo rate, also knowns as the short-term lending rate, by 25 basis points (0.25%) for the fifth time this year. The new repo rate stands at 5.15% which takes the cumulative rate cuts to 135 basis points (1.35%) and the lowest since April 2010.
Reverse repo (the rate at which banks park money with the RBI) has been cut to below 5% and is currently at 4.9%.
The repo rate is the rate at which the RBI lends to the bank, while the reverse repo rate is the rate at which the RBI borrows from banks.
With this RBI rate cut, banks are expected to pass on this benefit to their consumers by reducing interest rates on personal, auto, home or any other loan which will result in lower EMI payments.
The MPC meeting comes in light of the RBI’s directive that forces all banks to offer loans with interest rates that mimic the movement of RBI’s repo rate. The banks are now obligated to cut their rates when the RBI does and effectively solve the issue of passing on the benefit of a rate cut to the consumer.
The MPC of the RBI has also cut the GDP growth forecast for the current FY 2019-20 from 6.9% to 6.1%. This is due to the first quarter Gross Domestic Product (GDP) growth plunging to 5%.
With regards to inflation, a key mandate of the RBI with a target of 4% in the medium term, the MPC has moved up the September quarter expectations to 3.6%. They have retained their projection for the second half of this fiscal year between 3.5%-3.7%.
Here are some key takeaways:
- The impact of the 135 basis point reduction in the repo rate will take time to filter into the system.
- The government will take steps to ensure that the fiscal deficit target of 3.3% of GDP is achieved.
- The RBI has cut the GDP forecast by 0.8% to 6.1%.
- The expected shortfall due to the corporate tax rate cuts can be made up from other sources.
- The RBI will continue its accommodative stance until growth is revived.
This stance will continue as long as the economy requires a booster to revive growth, all the while ensuring the inflation remains within the targets. Despite dovish commentary and rate cuts, equity markets have reacted negatively as RBI’s focus on the fast transmission of low-interest rates would put pressure on the bank’s margins. The economic growth outlook also remains grim despite the 135 basis point policy rate cut with limited room for the RBI to take further monetary actions to support the economy.
The MPC will meet next in December 2019.