Mumbai: To shore up slackening growth, the Reserve Bank of India (RBI) on Wednesday broke with convention by reducing its key lending rates by 35 basis points which is expected to make home and auto loans cheaper and rev-up the economy by unleashing consumption-led demand.
Accordingly, the RBI's monetary policy committee (MPC) in its third policy review of the current fiscal reduced the repo, or short termed lending rate for commercial banks, by 35 basis points to 5.40 per cent from 5.75 per cent.
The reverse repo rate was revised to 5.15 per cent, and the marginal standing facility (MSF) rate and the bank rate to 5.65 per cent.
Besides, reducing key lending rates for the fourth consecutive time, the MPC maintained its accommodative stance of monetary policy.
A lower repo lending rate for commercial banks will reduce interest cost on automobile and home loans; thereby ushering in growth.
Currently, high GST tax rate, along with stagnant wages, farm distress and liquidity constraints have demoralised auto, home and capital goods buyers.
Even the high frequency indicators suggested moderation in economic activity.
As per the monetary policy statement, the MPC was of the view that the standard 25 basis points reduction might prove to be inadequate in view of the evolving global and domestic macroeconomic developments.
Acknowledging the departure from the standard policy of reducing or increasing key rates in the multiples of 25, RBI Governor Shaktikanta Das said the practice was not "sacrosanct" and that the MPC found 35 basis points as sufficient for the time period, as 25 basis points would have been "inadequate" and 50 would have been "excessive".
Historically, the central bank has been either reducing or increasing rates in the multiples of 25 basis points.
On the growth front, the MPC reduced its forecast to 6.9 per cent from 7 per cent in FY2019-20.
The GDP growth for the first quarter of FY2020-21 is projected at 7.4 per cent.
In the June resolution, MPC had projected the real GDP growth for 2019-20 at 7 per cent – in the range of 6.4-6.7 per cent for H1:2019-20 and 7.2-7.5 per cent for H2 – with risks evenly balanced.
"Various high frequency indicators suggest weakening of both domestic and external demand conditions," the MPC said in a statement.
"The 'Business Expectations Index of the Reserve Bank's industrial outlook survey' shows muted expansion in demand conditions in Q2, although a decline in input costs augurs well for growth."
However, MPC said that the impact of monetary policy easing since February 2019 is also expected to support economic activity, going forward.
"Moreover, base effects will turn favourable in H2:2019-20. Taking into consideration the above factors, real GDP growth for 2019-20 is revised downwards from 7 per cent in the June policy to 6.9 per cent – in the range of 5.8-6.6 per cent for H1:2019-20 and 7.3-7.5 per cent for H2 – with risks somewhat tilted to the downside...," the statement said.
Nonetheless, equity investors were disappointed, as there were no announcements on new measures to boost consumption.
Consequently, the S&P BSE Sensex closed 286.35 points or 0.77 per cent lower at 36,690.50 points, while the NSE Nifty50 was down 92.75 points or 0.85 per cent at 10,855.50 points.
"Markets reacted negatively immediately to the 35 bps cut in repo rate cut largely on the basis of "sell on news" reaction even as the cut was more than the majority expectations," said Deepak Jasani, Head of Retail Research, HDFC Securities.
"Cyclical stocks (Bank, Metals, Auto) were impacted the most...."