RBI cuts policy repo rate by a further 25 bps to 6%

04 Apr 2019

The Reserve Bank of India (RBI) today announced a further 25 basis point reduction in its policy repo rate to 6.00 per cent from 6.26 per cent, in a bid to further ease liquidity.

The Monetary Policy Committee (MPC) at its meeting today decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.0 per cent from 6.25 per cent with immediate effect.

Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25 per cent.

RBI said the MPC also decided to maintain the neutral monetary policy stance on the basis of an assessment of the current and evolving macroeconomic situation.

This is the second rate cut by the six-member MPC ever since Das was appointed governor. The move made India the only country in Asia to have cut interest rates twice in three months.

MPC voted 4:2 in favour of the rate cut with Pami Dua, Ravindra Dholakia, Michael Debabrata Patra and Shaktikanta Das voting to reduce the policy repo rate and Chetan Ghate and Viral Acharya voting to keep the policy rate unchanged.

RBI expects a decline in the country’s GDP growthrate. “GDP in the first half of FY20 may stay in 6.8-7.1 per cent range while the same may jump to 7.3-7.4 per cent in the second half,” the RBI said in a press release.

RBI said 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.

RBI noted that as per the second advance estimates for 2018-19 released by the Central Statistics Office (CSO) in February 2019 revised India’s real gross domestic product (GDP) growth downwards to 7.0 per cent from 7.2 per cent in the first advance estimates. Domestic economic activity decelerated for the third consecutive quarter in Q3 of 2018-19 due to a slowdown in consumption, both public and private.

However, gross fixed capital formation (GFCF) growth remained in double digits for the fifth consecutive quarter in Q3, with the GFCF to GDP ratio rising to 33.1 per cent in Q3 of 2018-19 against 31.8 per cent in Q3 of 2017-18, supported primarily by the government’s thrust on the road sector and affordable housing. The drag on aggregate demand from net exports also moderated in Q3 due to a marginal acceleration in exports and a sharp deceleration in imports led by a decline in crude oil prices.

On the supply side, the second advance estimates of the CSO placed the growth of real gross value added (GVA) lower at 6.8 per cent in 2018-19 compared with 6.9 per cent in 2017-18. GVA growth slowed down to 6.3 per cent in Q3 due to a deceleration in agriculture output from the record level achieved in the previous year.

Industrial GVA growth remained unchanged in Q3, with manufacturing GVA growth slowing somewhat. Services GVA growth also remained unchanged in Q3 while growth in construction activity accelerated, there was some loss of momentum in public administration, defence and other services.

Beyond Q3, the second advance estimates of foodgrain production for 2018-19 at 281.4 million tonnes were 1.2 per cent lower than the fourth advance estimates of 2017-18, but 1.4 per cent higher than the second advance estimates of 2017-18. According to the National Oceanic and Atmospheric Administration (NOAA) of the US, El Niño conditions strengthened during February 2019, which may affect the prospects of a normal south west monsoon.

Of the high frequency indicators of industry, the manufacturing component of the index of industrial production (IIP) growth slowed down to 1.3 per cent in January 2019 due to automobiles, pharmaceuticals, and machinery and equipment. The growth of eight core industries remained sluggish in February.

Credit flows to micro and small as well as medium industries remained tepid, though they improved for large industries. Capacity utilisation (CU) in the manufacturing sector, however, as measured by the Reserve Bank’s order books, inventory and capacity utilisation survey (OBICUS), improved to 75.9 per cent in Q3 from 74.8 per cent in Q2 exceeding its long-term average; the seasonally adjusted CU rose to 76.1 per cent from 75.4 per cent. The business assessment index of the industrial outlook survey (IOS) points to an improvement in overall sentiments in Q4.

Retail inflation, measured by y-o-y change in the CPI, rose to 2.6 per cent in February after four months of continuous decline.

Total durable liquidity injected by the Reserve Bank through OMOs aggregated Rs2,98,500 crore (Rs2,985 billion) for 2018-19. Liquidity injected under the LAF, on an average daily net basis, was Rs95,003 crore (Rs950 billion) during February (7-28 February 2019) and Rs57,043 crore in March. The weighted average call rate (WACR) remained broadly aligned with the policy repo rate in February and March.

Anticipating the seasonal tightening of liquidity at end-March, the Reserve Bank conducted four longer term (tenor ranging between 14-day and 56-day) variable rate repo auctions during the month in addition to the regular 14-day variable rate term repo auctions. Furthermore, the Reserve Bank conducted long-term foreign exchange buy/sell swaps of $5 billion for a tenor of 3 years on 26 March 2019, thereby injecting durable liquidity of Rs34,561 crore into the system.

Export growth remained weak in January and February 2019 mainly due to exports of petroleum products decelerating in response to a fall in international crude oil prices.

Net FDI inflows were strong in April-January 2018-19. Foreign portfolio investors turned net buyers in the domestic capital market in Q4 of 2018-19. India’s foreign exchange reserves were at $412.9 billion on 31 March 2019.

The previous bi-monthly monetary policy resolution of February 2019 had projected CPI inflation at 2.8 per cent for Q4 of 2018-19, 3.2-3.4 per cent for H1 2019-20 and 3.9 per cent for Q3 of 2019-20, with risks broadly balanced around the central trajectory.

Actual inflation outcomes averaged 2.3 per cent in January-February.

RBI expects inflation path during 2019-20 to be shaped by several factors, including food inflation, fuel group inflation and inflation rate for other products.