Published: Sat, April 06, 2019
Finance | By Loren Pratt

RBI rate cut: A stimulus for the economy

RBI rate cut: A stimulus for the economy

In its first bi-monthly monetary policy meet of this financial year (FY19-20), the Reserve Bank of India (RBI) on Thursday made a decision to cut repo rate by 25 basis points (bps) or 0.25 per cent to 6 per cent.

The RBI's six-member monetary policy committee (MPC) began its three-day review on Tuesday, and most analysts expected it to take a cautious approach given uncertainty over who will lead the government after the coming election and what their fiscal policy will be. Global economic activity has been seen further losing its pace since the last MPC meeting in February 2019, when the RBI announced cut for the first time since August 2018. The repo rate now stands at 6 per cent.

Stocks fell following the RBI's Monetary Policy, as the hopes were that the central bank would adopt a dovish stance. "The questions to the Governor in the post policy interactions also circled around liquidity deficit and lack of transmission of rate cuts", said Amar Ambani, head of research at YES Securities.

"The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front", the RBI said in a statement.

A back-to-back cut in interest rate would provide relief to borrowers in the election season, experts say. The MPC headed by RBI Governor Shaktikanta Das will announce the resolution of the meeting at around noon on Thursday.

This is the second time in 2019 that the central bank has cut the repo rates.

Earlier, the second advance estimates for 2018-19 released by the Central Statistics Office (CSO) in February 2019 revised India's real gross domestic product (GDP) growth downwards to 7 per cent, from 7.2 per cent projected in the first advance estimates.

CPI inflation excluding food and fuel declined to 5.2 per cent in January, but rose to 5.4 per cent in February, driven by a broad-based pick-up in inflation in the personal care and effects, and recreation and amusement sub-groups.

On the positive side, the RBI said, higher financial flows to the commercial sector augur well for economic activity.

The lower repo, or short-term lending rate for commercial banks, will reduce interest costs on automobile and home loans, thereby giving a push to demand.

Sluggish private investment and a weakening rural economy pulled India's economic growth down to 6.6 percent in the December quarter, its slowest in five quarters, while the unemployment rate hit multi-decades high.

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