RBI's Repo Rate Cut - April 2019 Review

Why in news?

The Reserve Bank of India recently cut the repo rate by 25 basis points to 6%, in its recent bi-monthly meeting.

What are the highlights?

• The monetary policy committee of the RBI has decided to maintain the 'neutral' monetary policy stance.
• Besides, the RBI has also revised its GDP projection downwards for Financial Year 2020 (FY’20).
• In the February policy, it had projected a GDP growth of 7.4% for FY’20 - in the range of 7.2-7.4% in H1, and 7.5% in Q3.
• But in the latest monetary policy statement this has been revised downwards to 7.2% - in the range of 6.8-7.1% in H1 and 7.3-7.4% in H2.

What are the likely implications?

• Repo rate is the key interest rate at which the RBI lends short-term funds to commercial banks.
• RBI’s reduction in benchmark rates is largely an acknowledgement of a slowdown in growth and is thus likely to boost the economy.
• It also signals a shift in policy since Shaktikanta Das assumed office as Governor of the RBI.
• The Monetary Policy Committee (MPC) now seems to be not solely focussed on inflation but also takes into account growth trends with equal seriousness.
• The MPC’s neutral policy stance is laudable given the uncertainties ahead.
• It would give RBI the flexibility to rework on the policy in tune with the emerging data sets.
• But banks may be able to pass on the RBI’s present rate cut to borrowers only to a limited extent.
• Banks had only reduced their lending rates by under 10 basis points (bps) after the RBI’s last 25 bps cut in February.
• Deposit growth has come down sharply and banks are competing with one another to attract depositors.
• The rate cut may further impact this as it translates into a lower interest rate earned by depositors and thus mean less deposit mobilisation.

Why is the downward revision of GDP growth?

• The central bank noted that there have been some signs of weakening in the domestic investment activity.
• This is reflected in the recent slowdown in production and imports of capital goods.
• Further, a moderation of growth in the global economy might impact India’s exports.
• These are the risks that have led the central bank to lower its projection.
• However, it pointed that higher financial flows to the commercial sector augur well for economic activity.
• Also, private consumption which has been dull is expected to get a fillip.
• Public spending in rural areas and an increase in disposable incomes of households due to tax benefits could help in this regard.

What is the inflation outlook?

• Inflation, despite the mild spike in February, is well under control at 2.6%.
• It is projected to average at 3.2% to 3.4% in the first half of 2019-20, well below the 4% target set for the MPC.
• The domestic and global demand-supply balance of key food items is also expected to remain favourable.
• So the short-term outlook for food inflation certainly remains favourable.
• However, early forecasts indicate a strong possibility of a below-normal monsoon due to El Nino.
• Such an event would have an impact on the agricultural output, and consequently on the food prices.
• There is also the risk of an abrupt reversal in vegetable prices, especially during the summer months.
• Besides, the RBI also noted that crude oil prices have risen around 10% since the February policy.
• All these factors are found to reflect the uncertainties in the inflation trend and outlook.

Source: Indian Express, The Hindu

Author: Shankar Civil Service Coaching Center Bangaluru

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