RBI cuts repo rate by 35 bps to 5.40% in bid to boost consumption

RBI's monetary policy committee (MPC) announced the decision after its third policy review of the current fiscal.

“Monetary Policy Committee (MPC) at its meeting today decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75 per cent to 5.40 per cent with immediate effect. Consequently, the reverse repo rate under the LAF stands revised to 5.15 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.65 per cent,” RBI stated in a release.

The MPC also decided to maintain the accommodative stance of monetary policy.

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 stated.

Addressing a post-policy press meet, RBI governor Shaktikanta Das said there is no prescription for rate reductions and that the decision to reduce the rate to 35 basis points is in order.

He also stated that there is nothing "sacrosanct" in manoeuvring the policy in the multiples of 25 basis points, adding that the MPC found 35 basis points as sufficient for the time period. 

The MPC in its third policy review of the current fiscal also reduced the growth rate to 6.9 per cent from 7 per cent in FY2019-20.

In the June resolution, MPC had projected the real GDP growth for 2019-20 at 7 per cent - in the range of 6.4-6.7 per cent for H1:2019-20 and 7.2-7.5 per cent for H2 - with risks evenly balanced.

Besides, the GDP growth for the first quarter of FY2020-21 is projected at 7.4 per cent.

"Various high frequency indicators suggest weakening of both domestic and external demand conditions," the MPC said in a statement.

"The 'Business Expectations Index of the Reserve Bank's industrial outlook survey' shows muted expansion in demand conditions in Q2, although a decline in input costs augurs well for growth." 

However, MPC said that the impact of monetary policy easing since February 2019 is also expected to support economic activity, going forward. 

"Moreover, base effects will turn favourable in H2:2019-20. Taking into consideration the above factors, real GDP growth for 2019-20 is revised downwards from 7 per cent in the June policy to 6.9 per cent -- in the range of 5.8-6.6 per cent for H1:2019-20 and 7.3-7.5 per cent for H2 - with risks somewhat tilted to the downside...," the statement said. 

On the financial market performance the RBI said that they were driven by the monetary policy stances of major central banks and intensifying geo-political tensions. 

The rupee was trading at Rs70.78 to a dollar at noon against its previous close of 70.82.

RBI said the US dollar weakened against major currencies in June on dovish guidance by the US Fed but appreciated in July.

Emerging markets economy (EME) currencies, which traded with an appreciating bias in July, depreciated in early August on escalation of trade tensions, the RBI added.