RBI reduces the repo rate to 6 per cent

The monetary policy committee (MPC) in its first bi-monthly monetary policy statement of 2019-20, under governor Shaktikanta Das, has decided to lower the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points (bps) to 6.0 per cent from 6.25 per cent. The move was widely anticipated amidst the rising concern about the health of the economy. Niranjan Hiranandani, National President, NAREDCO and Sr VP, Assocham, said,

“The Indian economy needs liquidity as fuel to power the growth engine. The RBI move is expected to lift industry sentiments, as also provide relief to various stakeholders like corporate, real estate and homebuyers. We expect banks to further pass down the benefit of the rate cut to home buyers which shall further trigger the actual sales.”

That said, as per RBI, the reverse repo rate under the LAF stands adjusted at 5.75 per cent, and the marginal standing facility rate and the bank rate at 6.25 per cent. With this, the MPC decided to maintain the neutral policy stance. “These decisions are in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” stated the RBI circular. The GDP growth was projected at 7.4 per cent for the first half of the Financial Year (FY) 2019-20.  

The on-going weakening investment activity resulting in slowdown in production and imports of capital goods, led RBI to lower its GDP growth projection at 7.2 per cent for FY 2019-20. “CARE Ratings expect 25-50 bps rate cut during the year given that RBI has lowered its projections for inflation and economic growth but will be data driven. We are expecting the retail inflation to move towards four per cent in FY2020 and GDP growth to be around 7.1 per cent in the same period,” stated CARE ratings in its monetary policy review. Agreeing with it, Rajni Thakur, Economist, RBL Bank, said, “The forward guidance for growth and inflation remains mixed and indicates shallow cuts here and there and not a cut cycle for now. At this point, RBI seems to be more focused on the efficacy of rate cut and its transmission to the end borrowers and we expect to see more action on the liquidity front than rates in the current cycle.”   

Although the move was much expected and the street was discounting the same, many experts foresee the short-term correction in the market.

“Over the short term, we believe this could trigger a correction. Currently, the market was discounting the rate cut on the hope of a decisive mandate in upcoming the Lok Sabha polls in 2019. Hence investors and traders should be aware that the trend is intact and on the upside. Any dips in this trend of three to five per cent are good and should be utilised. We remain bullish on this trend,” explained Mustafa Nadeem, CEO, Epic Research.  

(With additional inputs from Aparajita Gupta)