RBI Cuts Repo Rate By 25 bps to 5.15%|Monetary Policy Review Oct 2019

RBI Monetary Policy Meet Highlights (4th October, 2019)

Introduction

Reserve Bank of India, RBI cuts repo rate by 25 bps from 5.40% from 5.15% on 4th October 2019. RBI decided to continue with the Accommodative stance of monetary policy and also lowered GDP growth projections to 6.1% from 6.9%, in its forth Bi-monthly monetary policy meet of the financial year 2019-20.

RBI Cuts Repo Rate By 25 bps to 5.15% – Monetary Policy Meet Key Highlights

• On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting on 4th October, 2019 decided to reduce the policy repo rate by 5 basis points to 5.15% from 5.40% with immediate effect.
• The MPC also decided to continue with the Accommodative stance of monetary policy as long as it is necessary for reviving growth.
• These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2%, while supporting growth.

1. RBI cuts Repo Rate by 25 bps to 5.15% from 5.40%

• RBI cuts repo rate by 25 basis points to 5.15% from 5.40% with immediate effect. Consequently, the reverse repo rate adjusted to 4.90 from earlier rate 5.15% and the marginal standing facility (MSF) rate and the Bank Rate to 5.40%.
• This is the fifth consecutive repo rate cut since Shaktikanta Das took over as the governor in December 2018. RBI had cut the policy rate by 110 basis points prior to this, through 3 rate cuts of 25 bps each in February, April, June and one ate cut of 35 bps cut in August MPC meet.

2. RBI to continue with Accomodative Stance of Monetary Policy

• RBI has decided to continue with the Accomodative stance of monetary policy as long as it is necessary to revive growth.
• It is prudent to remain accomodative as stated by MPC. In the second bi-monthly policy review of FY20 held in June 2019, MPC had changed the monetary policy stance from neutral to accomodative.
• A significant weakening of growth impulse, slowdown in investment activity and a continuous moderation in private consumption growth is a matter of concern, as noted by MPC.
• On account of the slowdown in the above mentioned macroeconomic indicators, RBI sees scope to accommodate growth by supporting efforts to boost demand and re-energize the private investment activity.

3. Revision in GDP Projections to 6.1% from 6.9% for FY2019-20

• GDP growth for 2019-20 is revised downwards from 6.9% in the August policy to 6.1% on account of weakening of both domestic and external demand conditions.
• In October MPC meet, GDP growth is revised to 5.3% in Q2: FY2019-20
  • It is due to significantly lower than expected GDP number in June quarter ie. 5% from 5.8% in previous quarter. Various high frequency indicators suggest that domestic demand conditions have remained weak.
  • The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q3. Export prospects have been impacted by slowing global growth and continuing trade tensions.
• Also, GDP growth projections are in the range of 6.6-7.2% for H2: FY2019-20, with risks evenly balanced.
• GDP growth for Q1: FY2020-21 is also revised downwards to 7.2%.
• The GDP projections for H2: FY2019-20 and Q1: FY2020-21 are made on the following positive outlooks.
• The impact of monetary policy easing since February 2019 is gradually expected to feed into the real economy and boost demand.
• Several measures announced by the Government to boost growth :
  • Corporate Tax Rate Cut
  • Withdrawal of Higher Surcharge on sale of Equity by FPIs as well as domestic investors
  • No Tax on Buyback of shares announced prior to 5th July, 2019
• The above measures are expected to revive sentiment and spur domestic demand, especially private consumption in coming quarters.

4. Revision in CPI Inflation

• RBI has revised Consumer Price Index (CPI) inflation 3.4% from earlier 3.1% for Q2: FY2019-20 and 3.5-3.7% for H2: FY2019-20, with risks evenly balanced. CPI inflation for Q1: FY2020-21 is projected at 3.6%.
• Following are the key driving factors which are taken into consideration by MPC for the revision in CPI forecast :
  1. Impact of recent policy rate cuts
  2. Rise in food inflation driven by uneven temporal monsoon in 2019
  3. Volatile Crude-oil prices due to Geo-political tensions in middle-east
  4. Ease in the output prices by the manufacturing firms as stated in the industrial outlook
  5. Near-term Price pressures due to volatile currency

5. Transmission Process

• The success of the accommodative policy would depend entirely on the next level of its application, that is, the transmission of the lower rates to the ultimate borrowers. Thus the key determining factor of expected favourable results of repo rate cut by RBI is the effective cascading of the benefits of lower base rate by the banks. 
• In simple words, when RBI cuts repo rate, banks should immediately cut the interest rates of the loans. Interest rates of home loans, vehicle loan or business loans should be come down hand-in-hand.
• The rate cut has sent a strong signal to domestic banks to cut lending rates before the festive season kicks off in September. 
• The transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last meeting of the MPC.
• RBI is going to focus on quick transmission of lower interest rates to the borrowers, issuing loans from the banks. Also, RBI has already made it mandatory for the banks to link the interest rates on loans to the repo rate.

Measures to Boost Payments System

• Liquidity Support for the Proposed 24×7 National Electronic Funds Transfer (NEFT) System
  • It was announced in the third bi-monthly Monetary Policy of August 7, 2019 that the Reserve Bank of India will make available the facility of National Electronic Funds Transfer on 24×7 basis for members of public from December, 2019.
  • In order to facilitate smooth settlement of these transactions in the accounts of the banks maintained with the Reserve Bank, it has been decided that RBI will extend the collateralised liquidity support 24*7, which is currently available till 7.45 pm on NEFT working days.
  • This will help in better funds management by banks.

Market Fall Post Repo Rate Cut Announcement

Summary

• On account of US Fed’s rate cut Global rates are cycling down. Oil and commodity prices are also slipping on global uncertainty. The domestic inflation outlook remains liberal.
• Domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. Private consumption, the mainstay of aggregate demand, and investment activity remained sluggish.
• Even as past rate cuts are being gradually transmitted to the real economy, the liberal inflation outlook provides headroom for policy action to close the negative output gap.
• The growth concerns are addressed by MPC by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate (4% within a band of +/- 2%).
• The minutes of the MPC’s meeting will be published by October 18, 2019. The next meeting of the MPC is scheduled during December 3-5, 2019.