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RBI cuts interest rate by 25 bps

The benchmark interest rate of the Reserve Bank of India (RBI) fell below 6% for the first time since 2010 as the central bank’s monetary policy committee (MPC) cut repo rates by 25 basis points (bps) to 5.75% in order to address growth concerns.

The stance of the policy has also been changed from neutral to accommodative, which means a hike in interest rates is ruled out going forward.

The decision to reduce interest rate was unanimous among the MPC members. “The MPC notes that growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy,” the RBI said.

The central bank has revised GDP growth projection for the current financial year from 7.2% to 7%. “The headline inflation trajectory remains below the target even after taking into account the expected transmission of the past two policy rate cuts,” RBI Governor Shaktikanta Das said, during the media interaction. “Hence, there is scope to boost aggregate demand, and in particular, private investment activity, while remaining consistent with the mandate of flexible inflation targeting,” he said.

The path of consumer price index based inflation has been revised downward to 3.4-3.7% in the second half of the current financial year.

RBI targets 4% CPI inflation over the medium term.

The governor said banks transmitted only 21 basis points of the cumulative 50 basis points rate cut (in February and April).

“Our expectation is that as we go forward, there will be higher and faster transmission,” he said, adding the impact of the same will be seen in consumer and two-wheeler loans.

While yield on the 10 year benchmark government bond dropped 9 bps to close at 6.93%, equity indices settled in the negative territory.

The banking regulator also took steps to boost digital transactions as it decided to waive off the charges for fund transfer by Real Time Gross Settlement System (RTGS) — which is meant for large-value instantaneous fund transfers and the National Electronic Funds Transfer (NEFT) System for other fund transfers.

In addition, a committee has also been formed to review the charges in transactions in automated teller machines. The rate cut could lead to reduced EMIs on housing, vehicle and personal loans if banks decide to pass on the benefit.

Economists expect another rate cut in the August policy review to boost growth as inflation risks are likely to remain muted on a back of a normal monsoon. “Although the RBI revised its growth forecast lower for FY20, there could be further downside risks to their H1 growth estimates, warranting more rate cuts this year,” said Abheek Barua, Chief Economist, HDFC Bank.

“We believe that another rate cut could be in the offing in August, assuming that inflation risks remain muted,” Mr. Barua said.