RBI cuts repo rate by 35 bps to 5.40% to address growth concerns by boosting demand

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The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) today reduced its key policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75% to 5.40%, saying that addressing growth concerns by boosting aggregate demand, especially private investment, assumed the highest priority at this juncture.
Consequently, the reverse repo rate under the LAF stood revised to 5.15% and the marginal standing facility (MSF) rate and the Bank Rate to 5.65%, the central bank's Third Bi-monthly Monetary Policy Statement, 2019-20, based on the resolution of the MPC at its meeting here today.
The MPC also decided to maintain the accommodative stance of monetary policy.
"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," the statement said.
This was the fourth consecutive reduction in the repo rate by the RBI. The MPC had reduced the repo rate by 25 bps to 6.25% in its Sixth Bi-Monthly Monetary Police Statement for 2018-19 on February 7, by 25 bps to 6.00% in its First Bi-Monthly Monetary Policy Statement, 2019-20 on April 4 and by 25 bps to 5.75% in its Second Bi-Monthly Monetary Policy Statement 2019-20 on June 6.
The statement noted that, in the second bi-monthly monetary policy resolution of June 2019, CPI inflation was projected at 3.0-3.1 per cent for H1:2019-20 and 3.4-3.7 per cent for H2:2019-20, with risks broadly balanced.
The actual headline inflation outcome for Q1:2019-20 at 3.1 per cent was in alignment with these projections.
"The baseline inflation trajectory for the next four quarters will be shaped by several factors. First, the uptick in food inflation may be sustained by price pressures in vegetables and pulses as more recent data suggest. Uneven spatial and temporal distribution of monsoon could exert some upward pressure on food items, though this risk is likely to be mitigated by the recent catch up in rainfall. Second, despite excess supply conditions, crude oil prices may likely remain volatile due to geo-political tensions in the Middle-East. Third, the outlook for CPI inflation excluding food and fuel remains soft. Manufacturing firms participating in the industrial outlook survey expect output prices to ease in Q2. Fourth, one year ahead inflation expectations of households polled by the Reserve Bank have moderated.
"Taking into consideration these factors and the impact of recent policy rate cuts, the path of CPI inflation is projected at 3.1 per cent for Q2:2019-20 and 3.5-3.7 per cent for H2:2019-20, with risks evenly balanced. CPI inflation for Q1:2020-21 is projected at 3.6 per cent," it said.
In the MPC’s June resolution, real GDP growth for 2019-20 was projected at 7.0 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 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. 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 7.0 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; GDP growth for Q1:2020-21 is projected at 7.4 per cent.
"The MPC notes that inflation is currently projected to remain within the target over a 12-month ahead horizon. Since the last policy, 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 remain sluggish. Even as past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap. Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate," the statement said.
According to it, all members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy.
Four members --  Dr. Ravindra H. Dholakia, Dr. Michael Debabrata Patra, Mr. Bibhu Prasad Kanungo and RBI Governor Shaktikanta Das -- voted to reduce the policy repo rate by 35 basis points, while two members -- Dr. Chetan Ghate and Dr. Pami Dua-- voted to reduce the policy repo rate by 25 basis points.
The minutes of the MPC’s meeting will be published by August 21, 2019.  The next meeting of the MPC is scheduled during October 1, 3 and 4, 2019.

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