For the first time in one and a half years, the Reserve Bank of India (RBI) today cut the repo rate by 25 basis points or 0.25 per cent. The repo rate—the key interest rate at which banks borrow from the RBI—has thus come down to 6.25 per cent. The last time the central bank slashed the repo rate was in August 2017.
The cut may result in cheaper loans for business and home and auto buyers. The move, however, failed to enthuse the stock market, with both benchmark indices, Sensex and Nifty, ending flat at the end of the day.
The RBI also changed its policy stance from “calibrated tightening” to “neutral.” While four of the six members of the Monetary Policy Committee favored the cut, there was unanimity over the change in the stance.
“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,” the sixth Bi-monthly Monetary Policy Statement, 2018-19, said.
The reverse repo rate—the rate at which banks lend to the RBI—is now 6 per cent, the RBI said in its sixth bi-monthly policy statement for 2018-19.
GDP growth for 2018-19 in the RBI’s December policy was projected at 7.4 per cent and at 7.5 per cent for the first half of 2019-20, with risks somewhat to the downside, the RBI statement said. “Looking beyond the current year, the growth outlook is likely to be influenced by the following factors. First, aggregate bank credit and overall financial flows to the commercial sector continue to be strong, but are yet to be broad-based. Secondly, in spite of soft crude oil prices and the lagged impact of the recent depreciation of the Indian rupee on net exports, slowing global demand could pose headwinds.”
Therefore, the central bank has pegged growth for 2019-20 at 7.4 per cent with risks evenly balanced.
Headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook, the RBI said. “Beyond the near term, some uncertainties warrant careful monitoring.”
On the Budget’s spending proposals, the RBI says that these “are likely to boost aggregate demand by raising disposable incomes, but the full effect of some of the measures is likely to materialize over a period of time.”