New Delhi: The Reserve Bank of India (RBI) on Thursday cut repo rate for the second consecutive time this year to 6% from the current 6.25%, a move that will cheer industry leaders over relief from high borrowing costs a week before the first phase of general elections.
The six-member monetary policy committee (MPC) headed by Governor Shaktikanta Das concluded its first meeting for the fiscal year 2019-20 with a decision to maintain the policy stance ‘neutral.’ On February 7, the central bank had reduced the key lending rate by 25 basis points.
Repo rate is the rate at which the RBI lends money to commercial banks. A repo rate cut allows banks to reduce interest rates for consumers on loans, and lowers equal monthly instalments on home loans, car loans and personal loans.
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“The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front,” said Das.
“The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish. Against this backdrop, the MPC decided to reduce the policy repo rate by 25 basis points and maintain the neutral stance of monetary policy.”
The GDP growth for 2019-20 in the February policy was projected at 7.4% with risks evenly balanced. Since then, said Das, there are signs of domestic investment activity weakening as reflected in a slowdown in production and imports of capital goods. Besides, the moderation of growth in global might impact India’s exports.
The RBI thus revised GDP projection for 2019-20 to 7.2%: 6.8 to 7.1% in the first half and 7.3 to 7.4% in the second half with risks evenly balanced.
The central bank though short-term outlook for food inflation remains benign, several uncertainties remain with a probability of below-normal monsoon. Consumer price inflation was seen at 2.9 to 3% in the first six months of FY 20, below the RBI’s comfort zone of 4%. However, the central bank sees inflation rising to 3.5 to 3.8% in the second half.
On the other hand, the outlook for oil prices continues to be hazy.
The MPC voted 4-2 in favour of 25 bps rate cut and 5-1 to keep stance unchanged at ‘neutral.’ Industry leaders have been demanding a substantial cut in the repo rate and bank lending rates which are needed to boost manufacturing and domestic demand and bolster economic growth.
However, there is a concern among government RBI officials that commercial banks with massive bad debts and weak deposit growth are not automatically passing through the RBI’s repo rate cuts to borrowers.