Taking market by surprise, the Reserve Bank of India on Wednesday cut the repo rate by 35 basis points to 5.40 in its third monetary policy review for the FY 2019-20. The central bank also lowered the GDP growth projection for 2019-20 from 7 per cent to 6.9 per cent.
Repo rate is the rate at which the central bank (RBI) lends money to other banks.
Addressing mediapersons on Wednesday, RBI governor Shaktikanta Das said the central bank has lowered the GDP growth forecast owing to demand and investment slowdown, which is causing dampening effect on the growth. He said that perhaps at this point of time, there is cyclical slowdown and not a deep structural slowdown, adding that the RBI is still working on structural reforms which are needed.
Kavita Chacko, senior economist of CARE Ratings said, "the deeper rate cut by the RBI of 35 bps surpassed market expectation. In terms of the impact on the economy it needs to be seen how quickly the banks transmit the rate cuts to borrowers going forward and whether there would be a pick up in investment activity."
She said that by saying that the slowdown is cyclical, the RBI expects a pick up in the economic activity in coming quarters and that it may not be prolonged. They also expect the past rate cuts and various measures taken by the government and the RBI in recent past to have a positive bearing.
The RBI, in its monetary policy statement, said: "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 first half of 2019-20 and 7.3-7.5 per cent for the second half -- with risks somewhat tilted to the downside.”
Last week, rating agency CRISIL had sliced its estimate of India’s gross domestic product (GDP) growth by 20 basis points to 6.9% for this fiscal, following a triangulation of downside risks: weak monsoon, slowing global growth, and sluggish high-frequency data for the first quarter.
Reducing the GDP forecast, Ashu Suyash, managing director and CEO of CRISIL, had said, “given the crosswinds, the sops announced so far might not be enough to pitchfork growth in this fiscal to, or above, the past 14-year average of 7 per cent per annum. Policy action looks more attuned to consumption than investment demand, which means consumption will be the first to ascend as the tide turns.”
India’s GDP had grown at an impressive 8.2% in fiscal 2017, the fastest in a decade. However, this was disrupted due to policy initiatives and reforms like demonitisation and implementation of GST, along with rising global uncertainty including from trade disputes between the US-China which together triggered a cyclical downturn.
Pushkar Mukewar, Co-Founder and Co-CEO of Drip Capital, a US & India-based trade finance firm says, “The Reserve Bank of India’s decision to cut policy rates by 35 basis points sends out a clear signal that reviving growth is a priority. The RBI’s move is in line with central banks across the world easing monetary policy. While the announcement is unlikely to impact the weakening rupee, the RBI governor has made it clear that the bank will take care of currency volatility. It is important to wait to see what measures the central bank will take in view of the weakening yuan and the trade war between China and the U.S. The downward revision in real GDP from 7% to 6.9% is likely to affect the short-term sentiment in the markets. Increasing flows to NBFCs will boost credit availability, which in turn is good news for the MSME sector and exporters of all verticals."