For 2nd time in 2019, RBI cuts repo rate by 25 bps

With retail inflation contained within the 4 per cent target, the Reserve Bank of India on Thursday cut the policy repo rate by 25 basis points. This is the second time on the trot that the central bank has cut rates to support growth.

The RBI also announced that banks will now be permitted, in a phased manner, to use an additional 2 per cent of securities under the Statutory Liquidity Ratio (SLR) for the purpose of maintaining the liquidity coverage ratio, offering relief to banks struggling with high credit-deposit ratios.

The six-member Monetary Policy Committee (MPC) voted by a 4:2 majority to reduce the policy repo rate from 6.25 per cent to 6 per cent. Repo rate is the interest rate at which the central bank provides liquidity to banks to overcome short-term liquidity mismatches.

Read the first bi-monthly monetary policy statement here

The committee voted by a 5:1 majority to maintain the neutral policy stance of the monetary policy.

“Global growth is slowing down...Domestic GDP growth is also estimated to slow in 2018-19, with high frequency indicators suggesting slackening of urban and rural demand as well as investment activity,” said RBI Governor Shaktikanta Das at the first bimonthly Monetary Policy press meet.

“Retail inflation rose to 2.6 per cent in February 2019 from a low of 2 per cent in January. However, the upturn has turned out to be 30-40 basis points lower than our projections made in the February policy,” he added.

Against this backdrop, the MPC voted to reduce the policy rate while maintaining a neutral stance.

Also read:MPC has reasons to reduce policy rate again

Asked if any steps were being taken to ensure that banks pass on the rate cut to consumers, Das said: “We are also conscious of the fact that there has to be appropriate and effective transmission of rates. After the last meeting, I had held a meeting with banks, both public and private sector. The banks have marginally cut (up to 10 basis points) their MCLR (marginal cost of funds-based lending rate). But more needs to be done.”

Lending rates

The second rate cut in the current calendar year (the first 25 basis points rate cut was in February) is likely to prod banks to cut the lending rates to borrowers, said Anil Gupta, Vice President and Sector Head - Financial Sector Ratings, ICRA.

Analysts at Nomura said the timing of the next cut is likely to be tricky; it could be either in June (60 per cent probability) or August (40 per cent probability).

“Given our expectation of a sharp growth slowdown, we believe that rate cuts should be frontloaded. In our view, the only rationale to wait until August is to have more clarity on the monsoon, budget or transmission,” said a Nomura report.

CPI inflation

The path of CPI (retail) inflation has been revised downwards to 2.4 per cent for Q4 FY19 (against an earlier projection of 2.8 per cent) and 2.9-3 per cent for H1 FY20 (against 3.2-3.4 per cent), with risks broadly balanced.

GDP growth for FY20 is projected at 7.2 per cent, against the earlier projection of 7.4 per cent, with risks evenly balanced.

On Feb 12 circular

With the Supreme Court setting aside the February 12, 2018, circular on the revised framework for resolution of stressed assets , the RBI said it will take steps, including issuance of a revised circular,, for the expeditious and effective resolution of stressed assets.

The RBI has also given banks a breather on external benchmarking of new floating rate loans, which was to come into effect from April 1. The central bank said it will hold further consultations with stakeholders and work out an effective mechanism for transmission of rates.