RBI Cuts Repo Rate by 25bps to 5.75%

RBI Monetary Policy Meet Highlights 6^th June 2019

The Reserve Bank of India, RBI cuts repo rate by 25bps to 5.75% from 6% on 6^th June 2019. RBI also decided to change the stance of monetary policy to accommodative from neutral and lowered GDP growth forecast to 7% from 7.2%, in its second Bi-monthly monetary policy meet of the financial year 2019-20.

RBI Cuts Repo Rate

On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting on 6^th June 2019 decided to reduce the policy repo rate by 25 basis points to 5.75% from 6% with immediate effect. The MPC also decided to change the stance of monetary policy from neutral to accommodative. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

KEY HIGHLIGHTS OF RBI BI-MONTHLY MONETARY POLICY MEET

1. REPO RATE CUT BY 0.25%

• RBI cuts the repo rate by 25 basis points to 5.75% from 6.0% with immediate effect. Consequently, the reverse repo rate adjusted to 5.50% and the marginal standing facility (MSF) rate and the Bank Rate to 6%.
• All members of the MPC (Dr. Chetan Ghate, Dr. Pami Dua, Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Dr. Viral V. Acharya and Shri Shaktikanta Das) unanimously decided to reduce the policy repo rate by 25 basis points.

2. Accomodative Stance of Monetary Policy

• The Monetary Policy Committee (MPC) also decided to change the stance of monetary policy from neutral to accommodative.
• MPC has noted that growth impulses have weakened significantly compared to the April 2019 policy. A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern.
• Thus, RBI sees scope to accommodate growth concerns by supporting efforts to boost demand and reenergize the private investment activity.

3. FORECASTED GDP GROWTH RATE IS REVISED TO 7% FROM 7.2%

• GDP growth for 2019-20 is revised downwards from 7.2% in the April policy to 7%.
• It is revised in the range of 6.4-6.7% for H1:2019-20 (April to September FY2019-20) and 7.2-7.5% for H2 (September 2019 to March 2020) – with risks evenly balanced.
• 6.4-6.7% for Apr-Sept FY2019-20 : Q4 of FY2018-19 has indicated that domestic investment activity has weakened and overall demand has been weighed down partly by slowing exports. Weak global demand due to escalation in trade wars may further impact India’s exports and investment activity.
• 7.2-7.5% for Sept-Mar FY2019-20 : Because of key positive sides – political stability, high capacity utilisation, the uptick in business expectations in Q2, buoyant stock market conditions and higher financial flows to the commercial sector. These positive sides are promising for good investment activity.

4. Revision in CPI Inflation

• RBI has revised Consumer Price Index (CPI) inflation forecast for the first half of fiscal year 2019-20 to 3-3.1% from 2.9-3% earlier, while the projection for the second half stands revised to 3.4-3.7% from 3.5-3.8% earlier.
• The impact of recent policy rate cuts and expectations of a normal monsoon in 2019 are the factors which are taken into consideration by the the MPC for the revision in CPI forecast.

5. TRANSMISSION PROCESS

• 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.
• Transmission of the cumulative reduction of 50 bps in the policy repo rate in February and April 2019 was 21 bps to the weighted average lending rate (WALR) on fresh rupee loans.
• RBI has given a positive signal by repo rates cut. Because it helps enhancing the demand and thereby growing the economy.

6. RBI has removed NEFT & RTGS payment charges

• RBI has removed NEFT, RTGS payment charges to push digital transactions and has asked banks to pass on benefits to customers. 
• In order to provide an impetus to digital funds movement, it has been decided to do away with the charges levied by the Reserve Bank for transactions processed in the Real Time Gross Settlement System (RTGS) and National Electronic Funds Transfer (NEFT) systems.
• Thus, Banks will be required to pass these benefits to their customers. Instructions to banks in this regard will be issued within a week. 

7. POSITIVE IMPACT ON CORPORATE BANKS, AUTO COMPANIES, Real Estate

• A repo rates cut generally augers well for companies which are debt-laden (as it reduces interest cost), and banks as well as Housing Finance companies as it brings down the cost of funds for them. Thus, Repo rates cut can have a positive impact on the corporate banks such as SBI, ICICI Bank, Axis Bank, Yes Bank etc to increase their profitability.
• Due to current scenarios liquidity crisis in NBFCs sector such as DHFL and IL&FS, NBFCs are unlikely to get benefited even from repo rate cut. Thus it would offer an added competitive advantage for the banks to increase their profitability.
• Auto sector would also be one of the key beneficiaries of rate cut. Auto companies, specifically 2 wheeler auto companies such as Bajaj Auto, Hero Moto Cop can be benefited from the repo rates cut by boosting their sales numbers.
• For the real estate sector, a fall in interest rates could also mean lower EMIs. However, it all depends on the full transmission of the reduction in policy rate to the retail customers by the banks.

SUMMARY

1. Global economic activity has been losing pace, reflecting further slowdown in trade and manufacturing activity. Crude oil prices are remained volatile and there are many uncertainties surrounding US-China trade negotiations as well as Brexit.
2. Thus, Monetary Policy Committee (MPC) noted that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. So there is a need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish.
3. Against this backdrop, the MPC decided to reduce the policy repo rate by 25 basis and change the stance of monetary policy from neutral to accommodative.
4. The minutes of the MPC’s meeting will be published by June 20, 2019. The next meeting of the MPC is scheduled during August 5 to 7, 2019.