NEW DELHI: The six-member Monetary Policy Committee (MPC) of the Reserve Bank of India on Friday slashed the short-term lending rate, repo rate, by 25 basis points in its fourth bimonthly policy review.
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."
6-0 vote in favour of rate cut
All members of the MPC voted in favour of reducing the repo rate. Chetan Ghate, Pami Dua, Michael Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das voted for the 25 basis points rate cut. Ravindra H Dholakia voted for a 40 basis points rate cut.
The domestic stock market saw a sudden fall in response to the money policy outcome and the BSE Sensex traded 66 points higher at 38,172 after the policy announcement. The index was up 200 points in early trade.
This was the fifth consecutive rate cut effected by the Shaktikanta Das-led panel, and it was in addition to a cumulative 110 basis points rate cut that RBI has announced so far this year.
The repo rate now stands at 5.15 per cent, the lowest since March 2010.
No out-of-the-box rate cut, GDP estimate reduced
The rate cut came much in line with expectations, as benign inflation expectations offered policymakers room to try and revive a slowing economy. The RBI cut its GDP growth estimate for FY20 to 6.1 per cent compared with 6.9 per cent earlier. A few analysts were expecting the MPC to deliver an 'out-of-the box' rate cut of 35-40 basis points.
Retail inflation for August stood at 3.21 per cent, and the government’s recent measure to ban onion exports helped ease some concerns any imminent spike in food inflation. A volatile global trade scenario and uncertain geopolitical environment, which led to the weakening of demand globally, are some of the other reasons favoured a rate cut.
The MPC said that the negative output gap has widened further. While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum, the RBI statement read.
Global central banks more accomodative now
Globally also, commentaries by central banks have been largely dovish. “Global rates are cycling down with our US economists expecting the Fed to cut another 50 bps by December,” BofA-ML said on Thursday.
RBI said central banks have became more accommodative with inflation remaining below targets across major advanced economies and and emerging market economies.
Two Fed policymakers on Thursday signalled they were open to delivering another rate cut after a report showed the growth in the US services sector is slowing, pushing the Dow Jones Industrial Average up 122.42 points, or 0.47 per cent, to 26,201.04 and the S&P500 index by 23.02 points, or 0.80 per cent, to 2,910.63.
For India, the brokerage said that the rate cut should immediately reduce lending rates on retail and SME loans that are now linked to external benchmarks like the RBI repo rate.
Won't allow co-operative banks to fail
Meanwhile, Das said one should not use one incident to generalise the entire co-operative banking sector. He said the central bank would not allow any such bank to fail.
Responding to a question on PMC Bank, a corporative bank in the eye of storm, he said the central bank acted promptly and swiftly with the issue and that EOW is looking at the case.
Das said the RBI is in talks with the government on changing the regulations for co-operative banks.
“RBI won’t allow a co-operative bank to collapse,” the Governor said, while appealing depositors to not worry about banks.
Das said the RBI will use prompt corrective action whereever appropriate.
In case of Indiabulls Housing Finance and Lakshmi Vilas Bank merger proposal, Das said he won’t comment on individual cases.
No interim dividend demand from govt
Das, meanwhile, said he is unaware of any demand from the government on interim dividend.
PTI had earlier quoted sources as suggesting that the government may seek an interim dividend of about Rs 30,000 crore from the RBI towards the end of the financial year to meet its fiscal deficit target of 3.3 per cent of GDP for 2019-20.