The Reserve Bank of India has cut key interest rates for the fourth time in a row in its third monetary and credit policy review for the current financial year, but took the street by surprise by cutting the repo rate by an unusual 35 basis points, instead of the normal 25 bps steps.
The Reserve Bank of India has cut key interest rates for the fourth time in a row in its third monetary and credit policy review for the current financial year, but took the street by surprise by cutting the repo rate by an unusual 35 basis points, instead of the normal 25 bps steps. The RBI Monetary Policy Committee cut the repo rate to 5.4%, a little more that what was expected on the street. Subsequently, the reverse repo rate was also cut to 5.15% and the marginal standing facility rate to 5.65%. Governor Shaktikanta Das-led RBI MPC has cut policy interest rates by a total of 110 basis points, in four straight moves since February this year, as growth outlook weakens and inflation remains well under the central bank’s comfort level.
The RBI has also kept the policy stance unchanged at ‘Accommodative’. “All members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy.” RBI has been on a monetary policy easing spree in the backdrop of a slowdown in the consumption in the domestic sector. High-frequency indicators such as a slowdown in the automobiles sector, cement production, and fuel consumption have been under stress. “These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” RBI said in its Monetary and Credit Policy Statement.
Lower interest rates tend to boost consumption in the economy as people step up borrowing and spending. The economic slowdown and persistently low inflation were among the key considerations for RBI in determining in favour of another policy rate cut. Consumer Price Index (CPI) has continuously remained below the RBI’s target of an average 4 per cent for the last 11 months. However, inflation has shown an upward trend in the last six months. At 3.18 per cent, inflation has picked up to a 8-month high in June, but still below the central bank’s target.
Meanwhile, liquidity in the system has turned surplus since the MPC’s last meet in June. A review of the liquidity framework will be crucial in determining the outlook for money market rates, which is underway. Another major expectation from the central bank is the further revision of its prompt corrective action guidelines allowing the remaining banks functioning under this scheme to start lending.