RBI cuts interest rate second time this year
The Reserve Bank of India (RBI) cut key interest rates by a quarter of a percentage point on Thursday, its second reduction in two months, seeking to lift economic growth and consumer spending and lower borrowing costs in a move that comes just a week before the start of polling in the seven-phase general election.
RBI’s monetary policy committee (MPC) reduced the repo rate at which it lends short-term money to commercial banks, to 6% from 6.25%. The central bank lowered the reverse repo rate, at which it borrows money from commercial lenders, to 5.75% from 6%. It maintained a neutral policy stance, meaning that it’s not in favour of either increasing or lowering the interest rates.
RBI’s move “ demonstrates its renewed focus on strengthening the growth metrics at a time of benign inflation footprint and growth concerns,” Confederation of Indian Industry (CII) director general Chandrajit Banerjee said. He hoped banks will respond by lowering their lending rates so that the cost of borrowing declines.
RBI’s move gives banks some room to cut their loan rates, possibly lowering the equated monthly instalments (EMI) that individuals pay on home and consumer loans.
Any reduction may be limited given that banks’ deposit growth has declined and they are struggling to attract funds. After the last quarter of a percentage point cut in February, banks had responded by cutting their lending rates by just 5 to 10 basis points (bps). One basis point is one-hundredth of a percentage point.
“Transmission [of the rate cut] will happen because once you are in the downward interest rate trajectory, and if there is additional liquidity, it happens over a point of time. In the run-up to the elections, there will be currency leakage where the deposit growth slows down,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India. “After the elections, the currency leakage declines and the deposit growth picks up. By that logic, there will be transmission due to the rate cut. However, it will take time given the prevailing liquidity conditions.”
RBI reduced its GDP growth forecast to 7.2% for 2019-2020 from a prediction of 7.4% in February. Growth in the gross domestic product, or total output of goods and services, fell to 6.6% in the quarter ended December. Inflation was forecast to reach 3.8% in March 2020 from 2.6% in February 2019.
“The domestic economy is facing headwinds, especially on the global front,” the central bank said in a statement. “The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.”
Along with a slowdown in the global economy, domestic growth has decelerated because of a slowdown in consumption, both public and private, RBI said.
The predicted slowdown in global growth will hurt India, bankers and economists said. “There will be a steep slowdown [globally]. For instance, 3% growth we are seeing in the US, we expect it come closer to 2%,” said Ashutosh Khajuria, chief financial officer at Federal Bank.
India also confronts inflation risk. “For instance, oil prices are moving northward from $60 per barrel to $70 per barrel,” Khajuria said. “Food prices could be normal or adverse considering the base effect,” he said, adding that if private weather forecaster Skymet’s prediction of below normal monsoon rainfall proves to be correct, food prices would come under pressure.
The six-member MPC headed by RBI governor Shaktikanta Das voted 4-2 in favour of the repo rate cut. MPC members Chetan Ghate and Viral V Acharya voted to keep the policy rate unchanged. Ravindra H Dholakia voted to change the policy stance from neutral to accommodative while the rest of the MPC members voted in favour of keeping it neutral.
The second successive rate cut by the RBI under Das cancels out the two rate hikes that took place during his predecessor Urjit Patel’s tenure in 2018. Das became the RBI chief after Patel quit in December.
Stocks, bonds and the rupee ended lower. BSE’s benchmark Sensex index closed down 0.49% at 38,684.72. The 10-year benchmark government bond yield rose to 7.5% after the central bank’s decision, compared with Wednesday’s close of 7.42%. Bond prices and yields move in opposite direction.The rupee weakened to 69.04 to the dollar compared to the previous close of 68.42.