The Reserve Bank of India Thursday cut its benchmark policy rate, the repo rate (the rate at which it lends to banks), by 0.25 per cent or 25 basis points to 6 per cent - the second such back-to-back cut this year, in the face of low headline inflation and moderation in economic growth, both in India and globally.
The central bank, however, kept the monetary policy stance unchanged at 'Neutral' due to uncertainty over the monsoon after reports of El Nino effects and global economic outlook.
The lowering of rates by the RBI should logically lead to banks following suit but even after last month's interest rate cut, many lenders were reluctant with some reducing rates by just ten basis points, citing the higher cost of deposits.
Liquidity plan next move
The rate cut comes on the back of a slowdown in consumption demand, weakening investment activity and overall moderation in growth. This, along with RBI's plans to inject long-term liquidity worth $5 billion through a dollar-rupee swap on April 23 is expected to help in the transmission of rate cut.
The RBI also revised its GDP growth forecast for 2018-19 down to 7.2 per cent from 7.4 per cent projected in February policy, stating that since its last policy, there are some signs of domestic investment activity weakening as reflected in a slowdown in production and imports of capital goods and the moderation of growth in the global economy might impact India's exports.
"GDP growth for 2019-20 is projected at 7.2 per cent - in the range of 6.8-7.1 per cent in first half and 7.3-7.4 per cent in the second half - with risks evenly balanced," the RBI said. With general elections this month and the new government announcing the full Budget in June/July, RBI Governor Shaktikanta Das said, "the fiscal situation at the general government level requires careful monitoring".
The six-member Monetary Policy Committee of the RBI voted 4:2 in favour of the rate cut. Of the six-member Monetary Policy Committee (MPC) of the RBI, Pami Dua, Ravindra Dholakia, Michael Patra and Shaktikanta Das voted in favour of the decision to reduce the policy repo rate by 25 basis points. Chetan Ghate and RBI Deputy Governor Viral V Acharya voted to keep the policy rate unchanged.
"We are conscious of the fact that there has to be appropriate and effective transmission of rates. After the last meeting, I held a meeting with both public and private sector banks. The banks have marginally cut their MCLR, but more needs to be done," Governor Das said. "We are working on a timeline for transmission of rates but at this point, I do not want to mention a date," he said.
The rate cut is in consonance with achieving the medium-term objective of maintaining inflation at the 4 per cent level while supporting growth, the RBI said. It has revised the path of retail inflation downwards to 2.4 per cent in the fourth quarter of 2018-19, 2.9-3.0 per cent in the first half of 2019-20 and 3.5-3.8 per cent in the second half.
The MPC noted that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. "The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish," the central bank said.
On the positive side, the RBI said higher financial flows to the commercial sector augur well for economic activity. It further said private consumption, which has remained resilient, is also expected to get a fillip from public spending in rural areas and an increase in disposable incomes of households due to tax benefits. Business expectations continue to be optimistic.
In its monetary policy report, the RBI said alternative farm support schemes and farm loan waivers announced by some states, higher minimum support prices and food procurement, and lower direct tax collections could put upward pressure on the combined fiscal deficit. It also said that headline CPI inflation is expected to move up from its recent lows as the favourable base effects dissipate, but is expected to remain below the target of 4 per cent.
On the upside risk to inflation trajectory, it said higher crude oil prices, volatility in international financial markets, the risk of a sudden reversal in the prices of perishable food items, and fiscal slippages are some of the challenges.
"The central bank is monitoring the fiscal situation and will continue to watch the space closely," Das said. In his post policy interaction with the media, he said the RBI always goes with the official statistics prepared by the Central Statistics Office (CSO) while making its assessments on the economy and formulation of its policy responses. Last month, a group of over 100 economists had gone public with their reservations on the GDP and other key data prints in the light of the frequent revisions in the way the numbers are computed.
On his meeting with Finance Minister Arun Jaitley ahead of the policy, Das said there is nothing "unusual" about such a move. His predecessor Urjit Patel and his five-member MPC had once declined to meet the Finance Minister earlier. Das said such meetings have been on either physically or otherwise, even after the move to MPC-led rate setting.
Reacting to the RBI policy, State Bank of India chairman Rajnish Kumar said, "The downward revision in GDP and inflation projections reveals near term global headwinds and lower than anticipated rainfall might add to uncertainties."