RBI cut the repo rate by 35 basic points

The Reserve Bank of India (RBI), after its fortnightly Monetary Policy Committee (MPC) conference on Wednesday, decreased the repo rate by 35 basis points to 5.40 per cent. The central bank also updated the reverse repo rate to 5.15 per cent.

The MPC, directed by Shaktikanta Das, also decreased GDP growth point to 6.9 per cent from 7 per cent for the continuing financial year.

When questioned why the RBI opted for a 35-basis point rate reduction, Shaktikanta Das stated it is not unique, and added that a 25-basis point cut was short while 50 bps was extreme, so the MPC took an equitable call.

Mr Das said, “The monetary policy committee was of the view that a 25-basis point rate cut was inadequate due to evolving global economic conditions while a 50-basis point cut would be excessive.”

He added, “Hence, 35 basis points was viewed as a balanced level of cut due to the current circumstances.”

Four out of Six MPC voted in the inclination of a 35-bps cut in repo rate, RBI stated in its policy announcement. The MPC also chose to maintain its ‘accommodative’ position of the monetary policy.

The RBI stated, “Addressing growth concerns by boosting aggregate demand, especially private investment assumes the highest priority at this juncture while remaining consistent with the inflation mandate.”

Experts recommended that the cut in growth points may be due to decreasing sales figures in the automobile industry, which is supposed to continue over the next couple of quarters. Global relationships of the US-China trade war are also supposed to modify the estimation.

This attains in the backdrop of 3.18 per cent consumer rate increase, which is much under the RBI’s medium-term target of 4 per cent and grants the central bank room for a reduction in policy repo rate to support banks loan at cheaper rates to consumers and investors.

Core area increase of 0.2 per cent in June provided the MPC with another reason for a cut. Core sector includes eight key infrastructure industries including power, steel, cement, petroleum products and crude oil.

Four MPC members, Ravindra H Dholakia, Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das voted to decrease the policy repo rate by 35 basis points, and two members Chetan Ghate and PamiDua voted to decrease the policy repo rate by 25 bps.
The next gathering of the MPC is listed while October 1, 3 and 4, 2019.

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