RBI Cuts Repo rate by 25 bps to 5.75%, Changes Monetary Policy Stance to ‘Accomodative’

MUMBAI:
The Reserve Bank of India (RBI) Monetary Policy Committee Thursday unanimously cut repo rate — the rate at which it lends to banks — by 25 basis points from 6 per cent to 5.75 per cent. The bank also changed the monetary policy stance from neutral to accommodative.

The reverse repo rate and bank rate have been adjusted at 5.50 and 6.0 per cent respectively. The bank also lowered the Gross Domestic Product (GDP) growth forecast for 2019-20 to 7 per cent from 7.2 per cent in earlier projection. On the other hand, inflation projection has been raised to 3-3.1 per cent for April-September and 3.4-3.7 per cent for the second half of the year.

RBI has decided to do away with charges levied on RTGS and NEFT transactions, banks will be required to pass this benefit to their customers. This is the third straight interest-rate cut under RBI Governor Shaktikanta Das, who also heads the Monetary Policy Committee (MPC).

In its first meeting in FY’20, the MPC on April 4 had cut the key lending rate by 25 basis points from 6.25 per cent to 6 per cent. Reverse repo rate had been adjusted to 5.75 per cent and the committee had kept the monetary policy stance at ‘neutral’. The RBI had projected a GDP growth of 7.2 per cent for 2019-20, a revision from its February view of 7.4 per cent. It had also said that the consumer inflation was 2.57 per cent in February.

In February, the committee had cut repo rate by 25 basis points from 6.50 per cent to 6.25 per cent. The MPC had then shifted its stance to ‘neutral’ from ‘calibrated tightening’.

When the RBI cuts its benchmark lending rate, banks typically pass on the benefit to the customers. As and when the banks decide to pass on the rate cut, consumers could see home, auto and other loans getting cheaper. For retail consumers, a cut in rates could have a two-pronged impact. For depositors, new deposits will earn a lower rate and thereby lower returns. For borrowers, though, a downward movement of interest rate would bring down the interest outgo in the near future. For floating rate home loans, however, a new rate becomes effective on the reset date of the loan.

India is among central banks across Asia shifting to looser monetary policy to boost their economies amid risks from the US-China trade war. As the country heads into an economic downturn, the new government’s focus would be on reviving consumption demand, pushing investments and exports, and resolving the liquidity issues in the financial sector to help India get back on the 7%-plus growth trajectory in the long term.