RBI cuts repo rate to 9-year low, growth estimate to 7-year low

Wednesday 09th October 2019 05:53 EDT

India's central bank lowered its key policy rate yet again - the fifth successive time this year - in a bid to spur slowing economic growth. The latest cut by Reserve Bank of India (RBI), by a quarter percentage point to 5.15%, brought the benchmark repo rate (the rate at which RBI lends to banks) to a nine-year low. But the news was overshadowed by the RBI's announcement that it was sharply reducing India's growth forecast for the fiscal year to 6.1% from 6.9% projected earlier.

The six-member monetary policy committee (MPC) headed by Governor Shaktikanta Das announced the decision after a three-day meeting. Earlier on February 7, April 4, June 6 and Aug 7, the central bank had reduced the key lending rate to infuse liquidity and push economic growth. The decision of the RBI's monetary policy committee to cut the repo rate was unanimous with one member, Ravindra Dholakia, seeking a 40-bps cut. While RBI’s rate cut was modest considering its sharp downward revision of growth, Das promised to continue with an 'accommodative’ policy as long as is necessary to ensure growth momentum.

The five repo rate cuts that have taken place during RBI governor Shaktikanta Das's tenure collectively add up to 135 basis points (bps). While the earlier 115 bps rate cuts brought down bank lending rates by only 29bps, the current revision will immediately get passed on in full. RBI has asked banks to link their lending rates to an external benchmark like the repo rate, which has been chosen by most banks. RBI has asked banks to link their lending rates to an external benchmark like the repo rate, which has been chosen by most banks.

In a bimonthly review of the economy the central bank said the reduction was needed to revive growth from a six-year low. The cut in GDP growth estimate is the sharpest in recent memory and follows GDP growth slowing to an over 6-year low of 5% in April-June quarter, as consumer spending and corporate investment faltered. Declining industrial output and automobile sales suggest the slowdown could deepen.

The bank said that abundant rains in August and September have brightened the prospects for agriculture and a revival of domestic demand. But a surprise demonetization in 2016 and the hasty rollout of a goods and services tax have hammered India’s manufacturing sector, especially the auto industry. Instead of improving government finances as intended, the GST and demonetization have undermined India's financial stability.

To counter that, in August the central bank transferred $24 billion to the cash-starved government to help support stimulus measures, prompting criticism from opposition parties that it compromised the central bank's autonomy. Finance Minister Nirmala Sitharaman recently announced piecemeal policy reforms to stimulate the economy.

The Reserve Bank is following the path of many other central banks, including the Federal Reserve, in loosening monetary policy by making credit cheaper in hopes of spurring more lending and business activity.

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