While India’s economy continues to flounder, the Reserve Bank of India has gone for an unconventional repo rate cut of 35 basis points, as against the usual 25 or its multiples, and lowered the country’s GDP forecast.
The repo rate is the discount rate at which a central bank repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country’s monetary system. Repo is short for repossession.
With this cut the Reserve Bank of India has brought down the repo rate to a nine-year low of 5.4%. The central bank also lowered the growth projection for the current financial year to 6.9% from 7% earlier. It kept its inflation projection unchanged at 3.1%.
Reserve Bank Governor Shaktikanta Das has called upon all stakeholders to “act together” to lift economic growth and urged the banks to cut their lending rates. This is the fourth cut since Das took over.
The central bank’s data reveal that prior to this cut, it had reduced repo rates three times, totaling 75 basis points – but the commercial banks have so far cut only 29 basis points.
Though Das termed the current economic slowdown “cyclical,” a central bank survey indicated that consumers were becoming less optimistic about the future of the economy, their income and their employment prospects.
Das said credit growth would improve in the coming weeks and months. “The RBI will take whatever steps are required to ensure better transmission. It’s better to allow market forces to play, but wherever regulatory interventions are required the RBI will take necessary regulatory measures,” he said.
The six-member monetary policy committee voted unanimously for a cut. Four members voted for a 35-basis-point cut, while two external members, Chetan Ghate and Pami Dua, voted for a reduction of 25 basis points.
While lowering the GDP growth forecast, the central bank maintained that the risks are tilted to the downside as domestic economic activity remained weak, while the global slowdown and trade tensions intensified.
The monetary policy committee statement revealed that private consumption and investment activity remain sluggish. “Even as past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap. Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture,” the statement added.