RBI's Repo Rate Cut - April 2019 Review

Why in news?

The Reserve Bank of India recently cut the repo rate by 25 basis points to 6%, in its recent bi-monthly meeting.

What are the highlights?

The monetary policy committee of the RBI has decided to maintain the 'neutral' monetary policy stance.
Besides, the RBI has also revised its GDP projection downwards for Financial Year 2020 (FY’20).
In the February policy, it had projected a GDP growth of 7.4% for FY’20 - in the range of 7.2-7.4% in H1, and 7.5% in Q3.
But in the latest monetary policy statement this has been revised downwards to 7.2% - in the range of 6.8-7.1% in H1 and 7.3-7.4% in H2.

What are the likely implications?

Repo rate is the key interest rate at which the RBI lends short-term funds to commercial banks.
RBI’s reduction in benchmark rates is largely an acknowledgement of a slowdown in growth and is thus likely to boost the economy.
It also signals a shift in policy since Shaktikanta Das assumed office as Governor of the RBI.
The Monetary Policy Committee (MPC) now seems to be not solely focussed on inflation but also takes into account growth trends with equal seriousness.
The MPC’s neutral policy stance is laudable given the uncertainties ahead.
It would give RBI the flexibility to rework on the policy in tune with the emerging data sets.
But banks may be able to pass on the RBI’s present rate cut to borrowers only to a limited extent.
Banks had only reduced their lending rates by under 10 basis points (bps) after the RBI’s last 25 bps cut in February.
Deposit growth has come down sharply and banks are competing with one another to attract depositors.
The rate cut may further impact this as it translates into a lower interest rate earned by depositors and thus mean less deposit mobilisation.

Why is the downward revision of GDP growth?

The central bank noted that there have been some signs of weakening in the domestic investment activity.
This is reflected in the recent slowdown in production and imports of capital goods.
Further, a moderation of growth in the global economy might impact India’s exports.
These are the risks that have led the central bank to lower its projection.
However, it pointed that higher financial flows to the commercial sector augur well for economic activity.
Also, private consumption which has been dull is expected to get a fillip.
Public spending in rural areas and an increase in disposable incomes of households due to tax benefits could help in this regard.

What is the inflation outlook?

Inflation, despite the mild spike in February, is well under control at 2.6%.
It is projected to average at 3.2% to 3.4% in the first half of 2019-20, well below the 4% target set for the MPC.
The domestic and global demand-supply balance of key food items is also expected to remain favourable.
So the short-term outlook for food inflation certainly remains favourable.
However, early forecasts indicate a strong possibility of a below-normal monsoon due to El Nino.
Such an event would have an impact on the agricultural output, and consequently on the food prices.
There is also the risk of an abrupt reversal in vegetable prices, especially during the summer months.
Besides, the RBI also noted that crude oil prices have risen around 10% since the February policy.
All these factors are found to reflect the uncertainties in the inflation trend and outlook.

Source: Indian Express, The Hindu

Author: Shankar Civil Service Coaching Center Bangaluru