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Funds to get cheaper as RBI cuts rates by 25 bps days before Lok Sabha elections

The 25 bps cut in repo rate by monetary policy committee will make loans cheaper for borrowers.

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New Delhi: The Reserve Bank of India (RBI) Thursday announced an expected cut in key policy rates by 25 basis points, following a similar rate cut in February, a move that will make loans cheaper for borrowers.

The repo rate now stands at 6 per cent.

The rate cut decision by the monetary policy committee (MPC), coming days ahead of the first round of polling for the Lok Sabha elections, will be welcomed by the Modi government.

This is the first monetary policy review in the 2019-20 fiscal.

Also readSC ruling on RBI circular will only delay bad loans recognition & solution

Growth concerns

The central bank move comes at a time when inflation is well below the target but concerns over growth have resurfaced.

Retail inflation based on the consumer price index rose to 2.57 per cent in February, from 1.97 per cent in January, but remained well below the inflation target of 4 per cent. However, factory output data measured by the index of industrial production (IIP) slowed to 1.7 per cent in January from 2.4 per cent in December 2018.

The 4-2 decision of the MPC had independent member Chetan Ghate and RBI deputy governor Viral Acharya voting for maintaining status quo on rates.

“The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish,” a statement issued by the RBI said, adding that several uncertainties cloud the inflation outlook.

The monsoon outlook with the probability of El Niño, uncertain outlook for crude prices that have been rising and the fiscal situation were among the factors flagged by the RBI.

The RBI revised its GDP growth projections for 2019-20 downwards to 7.2% from 7.4%. It has also revised the inflation projection downwards to 2.9-3.0 per cent in first half of 2019-20 and 3.5-3.8 per cent in second half of 2019-20.

While banks have been slow in passing on the benefits of lower RBI policy rates to the customers, there are expectations that with a shift to a rate that is linked to an external benchmark rate like the repo rate, the transmission of monetary policy decisions will be faster.

With the SBI announcing last month that it will link its short-term loans and savings bank deposits to the RBI’s repo rate, customers can hope that more banks will follow suit enabling a faster transmission to lower interest rates in the days to come.

Also read: RBI governor Shaktikanta Das’ first rate cut move is government-friendly, as expected

‘Further easing unlikely in June’

The RBI move was welcomed by the government.

“Given further moderation in inflation expectations as estimated by RBI, rate cut of 25 bps is entirely appropriate. This should help in sustaining India’s growth to around 7.2-7.3% in FY 20,” Subhash Chandra Garg, secretary, department of economic affairs in the ministry of finance, wrote on Twitter.

Abheek Barua, chief economist, HDFC Bank said the current RBI projections on growth and inflation suggest that there is room for further easing but it is unlikely to happen in the next policy review in June.

“The MPC is likely to wait for further clarity on monsoon and its impact on food prices, the fiscal math of the new government, and the evolving dynamics in the global crude market before making its next move,” he said in a note.

Barua added that a rate cut in the August policy review will “hinge on how the above mentioned risks unfold”.

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