The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), led by Governor Shaktikanta Das, on Thursday unanimously lowered key lending rate or repo rate by 25 basis points or 0.25 per cent to 5.75 per cent amid dismal gross domestic product (GDP) growth, subdued investment and slowdown in consumption space.
The six-member MPC also changed the policy stance to “accommodative” from “neutral”.
Repo rate is the interest rate at which commercial banks borrow short-term funds from the RBI. Thursday’s decision comes after conclusion of a three-day meeting of the MPC. This was the third time in a row that the RBI lowered the key interest bringing it to a level last seen in September 2010.
The reverse repo rate and bank rate have been adjusted at 5.50 and 6.0 per cent respectively. The bank also lowered the Gross Domestic Product (GDP) growth forecast for 2019-20 to 7 per cent from 7.2 per cent in earlier projection.
Inflation projection has been raised to 3-3.1 per cent for April-September and 3.4-3.7 per cent or the second half of the year.
RBI has decided to do away with charges levied on RTGS and NEFT transactions, banks will be required to pass this benefit to their customers.
As and when the banks decide to pass on the rate cut, consumers could see home, auto and other loans getting cheaper. For retail consumers, a cut in rates could have a two-pronged impact. For depositors, new deposits will earn a lower rate and thereby lower returns. For borrowers, though, a downward movement of interest rate would bring down the interest outgo in the near future. For floating rate home loans, however, a new rate becomes effective on the reset date of the loan.
The cut in interest rate was on expected lines. Two-thirds of 66 economists in a poll conducted by news agency Reuters ahead of the release of GDP data had expected MPC to announce a 25-basis-points cut in the repo rate to 5.75 per cent.
The rate cut comes after official data last month showed the country’s GDP or gross domestic product grew 5.8 per cent in the quarter ended March 31. That meant India lost its status as the fastest growing major economy to China, which clocked a growth of 6.4 per cent in the three-month period.
The RBI has lowered its GDP target for financial year 2019-20 to 7 per cent from 7.2 per cent. The consumer inflation for the first half of financial year 2019-20 has been pegged in range of 3-3.1 per cent with risks evenly balanced, RBI noted in the policy statement.
In February, the committee had cut repo rate by 25 basis points from 6.50 per cent to 6.25 per cent. The MPC had then shifted its stance to ‘neutral’ from ‘calibrated tightening’.
Then, in its first meeting in FY’20, the MPC on April 4 had cut the key lending rate by 25 basis points from 6.25 per cent to 6 per cent. Reverse repo rate had been adjusted to 5.75 per cent and the committee had kept the monetary policy stance at ‘neutral’. The RBI had projected a GDP growth of 7.2 per cent for 2019-20, a revision from its February view of 7.4 per cent. It had also said that the consumer inflation was 2.57 per cent in February.