The Reserve Bank of India (RBI) delivered another rate cut on Friday — the fifth in as many policy review meetings to boost a slowing economy. However, the move failed to cheer the market which was betting on a bigger rate reduction.
The six-member monetary policy committee decided to cut interest rates by 25 basis points (bps) to 5.1% with five members voting in favour of the quantum while R.H. Dholakia voted for a 40 bps cut. [100 bps = 1 percentage point]
“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,” the RBI said.
Forecast trimmed
The central bank also revised its growth forecast for the current financial sharply, from 6.9% projected in the August policy, to 6.1%. Growth forecast for the first quarter of the next financial year was also trimmed to 7.2% from 7.4%.
Inflation forecast for the second half of FY20 has been retained at 3.5-3.7%.
“Noting that the output gap has widened since its last meeting, the MPC was of the view that the continuing slowdown warrants intensified efforts to restore the growth momentum... as long as the growth momentum remains as it is and till the growth is revived, RBI will continue to remain in an accommodative mode,” Shaktikanta Das, Governor, RBI, said in the post-policy interaction with the media.
The rate cut comes after GDP growth for the first quarter of the current financial year plunged to a 25-quarter low of 5%.
Between February and now, the central bank has reduced the policy rate by 135 bps.
“The lowering of the GDP growth outlook to 6.1% for FY20 also reflects a realistic projection in view of the weak domestic demand, slowing global growth and the continuing trade tensions,” Rajnish Kumar, chairman, SBI, said.
Equated monthly instalments on retail loans, such as home and auto loans, as well as credit to micro, small and medium-sized enterprises will become cheaper as banks have linked those loans to the repo rate, following a regulatory order.
Sensex tumbles
The market was clearly disappointed as it was expecting a bigger rate cut. Equity indices ended in the red with the Sensex shedding over 434 points or 1.14%, led by a fall in financial sector stocks.
“While markets were somewhat disappointed, as they were expecting a larger cut, the recent move needs to be seen cumulatively with the 110 bps cut that the RBI has already delivered in this rate cut cycle,” said Abheek Barua, chief economist, HDFC Bank.
Mr. Barua said RBI had clearly signalled its continued focus on reviving growth, implying that more rate cuts are in the offing.
“We expect 25-40 bps more cuts in this fiscal,” he said.
The bond market also did not hide its disappointment with the yields on the benchmark 10-year government bond spiking 8 bps to 6.69%.
