RBI cuts repo rate by 25 basis points; expects faster and higher transmission of benefits

RBI cuts repo rate by 25 basis points; expects faster and higher transmission of benefits
A man checks his phone outside the Reserve Bank of India (RBI) headquarters in Mumbai, India April 5, 2018. REUTERS/Francis Mascarenhas/File Photo
  • RBI cuts repo rate by 25 basis points to 5.75% from 6% in a unanimous decision.
  • Monetary policy stance changed to ‘accommodative’ from neutral.
  • RBI revised the GDP growth downwards to 7% for 2019-20 from 7.2% during the April policy rate.

India’s central bank cut the repo rate by 25 basis points to 5.75% from 6%, in its bi-monthly policy statement today. This is the third consecutive rate cut after similar cuts in April and February this year.

The monetary policy committee or MPC changed the monetary policy stance to ‘accommodative’ from neutral.

“The decision to cut the rate and the change in stance is unanimous. It reflects the resolve of the MPC to act decisively and in a timely manner,” the RBI governor Shaktikanta Das said at the ongoing press conference.

Higher and Faster Transmission

Das also said that central banks across the world have turned accommodative. He is also confident that three rate cuts accounting to 75 basis points this year will be translate it to loans, said the Governor who delivered a hatrick after cutting rates in February and April this year.

“The expectation is that the rate transmission will be higher and faster too. The effect will be seen in new consumer loans too,” Das said.

The Reserve Bank of India also has revised the GDP growth downwards from 7.2% during the April policy rate cuts, to 7% for 2019-20.

Repo rate is the rate at which RBI lends money to commercial banks. Any cut in this rate, will ease stress in the economy and increase liquidity as banks can borrow at a cheaper rate. This rate also becomes the base rate at which banks determine their own lending rates.

As per expectations

A lot of experts and agencies expected a 25 basis points rate cut, if not more. The stock markets have been rallying on expectations that the banks might get a lease of life, amidst many problems that they face.

Yet, there are doubts whether the benefits of this rate cut will be transmitted by the banks to the borrowers. It has happened many times that the banks absorbed the rate cut advantages without passing on the benefits to the industry or the consumers.

While Das took no steps to ensure that it will be transmitted, he said that 21 basis points have already been transmitted by banks. He had cut rates earlier in April and February too.

“We expect RBI to spell clearly its stand on how a large cut if impacted will lead to better transmission: will the banks be now mandated for benchmarking their asset and liability moving together? Otherwise, banks will not rate cut deposit rates given the huge currency leakage,” said Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

Is it enough?

The rate cut was much expected yet is believed to fall short for a stimulus that the economy desperately needs. India’s fourth quarter GDP numbers came in at 5.8%, which was lower than expectations. Many experts have revised the growth numbers for the year downwards, and expect the pressure to continue till October.

“We see further downside risks to growth as we await the reforms to begin bearing fruit in the medium term. We expect 2019-20 GDP growth to remain muted at 6.8%, with slowdown in the first half likely to continue and some improvement in consumption and investment likely in the second half,” said Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank.

As per SBI’s predictions, the growth rate will stay below 6%, at least in the first half of 2019-20 and will only recover in the second half. “Global growth is fast turning out to be an Achilles’ Heel,” added Ghosh.