The Reserve Bank of India (RBI) on Friday reduced the repo rate by 25 basis points (bps) to 5.15%, the lowest since March 2010. This was the fifth consecutive rate cut since Shaktikanta Das became RBI governor last December. Before Das took over the reins of the central bank, the repo rate—the rate at which banks borrow from the RBI—was 6.5%.

The latest 25 bps (100 bps=1%) reduction follows the unprecedented 0.35% cut effected in the previous Monetary Policy Committee (MPC) review meeting on August 7.

This time around, all members of the MPC voted to reduce the policy repo rate and to continue with the accommodative stance of monetary policy. While MPC members Chetan Ghate, Pami Dua, Michael Debabrata Patra, Bibhu Prasad Kanungo, and governor Das voted to reduce the repo rate by 25 bps, Ravindra H. Dholakia voted to reduce it by 40 bps.

While a rate cut was already anticipated by markets, the quantum was a matter of speculation. Alongside delivering a rate cut, “the MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target”, according to the RBI’s monetary policy statement.

The RBI also reduced its projection for FY20 gross domestic product (GDP) growth. From 6.9% in its August policy, the RBI has revised the FY20 GDP growth forecast to 6.1%.

The RBI in the statement said, “Various high-frequency indicators suggest that domestic demand conditions have remained weak”. The statement further added that the business expectations index of the central bank’s industrial outlook survey shows muted expansion in demand conditions in the third quarter of FY20.

“Export prospects have been impacted by slowing global growth and continuing trade tension, “the RBI added. However, on the positive side, the Reserve Bank expects that the impact of monetary policy easing since February 2019 is gradually expected to feed into the real economy and boost demand. “Several measures announced by the government over the past two months are expected to revive sentiment and spur domestic demand, especially private consumption."

Taking all these factors into consideration, the RBI revised downwards the GDP growth forecast for FY20 to 6.1%—5.3% in Q2 FY20, and in the range of 6.6-7.2% in the second half of FY20—with risks evenly balanced. It has also downward revised its GDP growth forecast for Q1 FY21 to 7.2%.

Soon RBI’s rate cut, the benchmark S&P BSE Sensex fell 243 points from its previous day’s close of 38,106.98 to the day’s low (until 1.00 pm) of 37,863.84 points. Before the decline, the Sensex had risen over 296 points to touch the day’s high of 38,403.54 points in early trade.

According to Ranjan Chakravarty, product strategist at the Metropolitan Stock Exchange, a 25-bps cut disappoints slightly. “(This rate cut) will neither significantly bump up consumption nor investment,” says Chakravarty. “The MPC needs to be more aggressive to give a proper push to growth,” Chakravarty opines as he is of the view that this (MPC review) was another opportunity foregone for now.

But, there are some optimists too. Like V.K. Vijayakumar, chief investment strategist at Geojit Financial Services. For Vijayakumar, the big takeaway from the extremely accommodative monetary is that the central bank and the government are in sync on the policy response to revive growth. “The MPC’s view that there is further policy space for accommodation to revive growth clearly indicates that more rate cuts are in the offing,” says Vijayakumar, who is of the view that eventually, the repo rate is likely to settle at 4.75% in the current rate cut cycle. “This is good news for the markets even though the markets are concerned about the issues in the NBFC and housing finance space," Vijayakumar adds.

According to Thomas John Muthoot, CMD of Muthoot Pappachan Group, in the backdrop of the measures taken by the government and central bank to drive structural changes in the economy and increase cash inflow, the latest repo rate cut adds to the much-needed respite. “These collective measures can be seen as a build-up to complement the government’s fiscal stimulus,” says Muthoot. “However, for the common man to get the benefits of these cuts, it is highly important that banks ease the challenges for NBFCs to get funding from them, eventually pushing consumer sentiments,” he adds.

In its policy statement, the RBI has been vocal of the fact that “monetary transmission has remained staggered and incomplete.” As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps, the RBI noted. However, the WALR on outstanding rupee loans increased 7 bps during the same period.

According to Nomura economists, Sonal Varma and Aurodeep Nandi, the October policy meeting was set against a backdrop of weaker growth, a resurgence of financial stability risks and a surprise fiscal stimulus (corporate tax cut). In the event, the RBI’s decision to deliver a more benign 25 bps rate cut suggests it is trying to balance growth concerns against limited remaining monetary policy space and a diminishing efficacy of monetary policy in boosting growth (hence the growing role of fiscal policy). “Considering the weaker-than-expected growth outlook, we believe a front-loaded policy action would have been the right approach, as it would have enabled banks to sharply lower their lending rates ahead of the upcoming festive season,” Varma and Nandi opine.

For governor Das, who had acknowledged that the recent dip in GDP growth took the central bank by surprise and as economists outside the RBI foresee FY20 GDP growth in the sub-6% range, a repo rate cut could continue to be the way forward.

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