Benign inflation provides room for further monetary policy easing while space for fiscal space is limited, RBI governor hinted earlier.
The RBI's monetary policy committee on October 4, 2019, i.e. Friday announced the fifth consecutive rate cut this year to support government measures for boosting economic activity amid benign inflation. The fourth bi-monthly monetary policy for 2019-20 was announced by the RBI Governor Shaktikanta Das-headed Monetary Policy Committee (MPC) after its three-day marathon meeting. The RBI lowered its key lending rate or the repo rate by 25 basis points (bps) to 5.15%, which would take cumulative cuts so far this year to 135 bps, according to experts. Admitting that India was facing a big economic slowdown, the RBI also revised the gross domestic product (GDP) growth for 2019-20 downwards from 6.9 per cent in the August policy to 6.1 per cent.
Delivering the fifth straight interest rate cut of the year, the Reserve Bank of India (RBI) on Friday reduced the liquidity adjustment facility (LAF) by 25 basis points to 5.15% from 5.40% with immediate effect. This means the apex bank has made a cut of 0.25% in the interest rates.
Announcing the interest rate cut in its Fourth Bi-monthly Monetary Policy Statement, 2019-20, the bank's Governor Shaktikanta Das declared that the policy repo rate under the liquidity adjustment facility (LAF) has been cut by 25 basis points to 5.15% from 5.40% with immediate effect.
As a result of the rate cut, the reverse repo rate under the LAF is now 4.90%, and the marginal standing facility (MSF) rate and the Bank Rate will be 5.40%.
A slowdown in global as well as the domestic economy is the main reason behind the rate cut with the RBI stating "the MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target".
"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth," the RBI statement pointed out.
With the global economic activity weakening further since the last RBI credit policy in August 2019, the apex bank stated that heightened uncertainty emanating from trade and geopolitical tensions continues to cloud the outlook. The US economy in quarter 2 of 2019 has continued into Q3 of the financial year, due to softer industrial production while Europe and Japan also battle a prolonged slump in economic activity.
The Policy Statement states, "On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today (October 4, 2019) decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.15% from 5.40% with immediate effect. Consequently, the reverse repo rate under the LAF stands reduced to 4.90%, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40%. The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth."
The RBI Governor had already hinted that benign inflation provides room for further monetary policy easing while space for fiscal space is limited.
Repo rate is the rate at which the RBI lends money to commercial banks. A repo rate cut allows banks to reduce interest rates for consumers and lowers equal monthly instalments on home loans, car loans and personal loans.
The central bank announced the rate cut to complement the government's measures like reducing corporate tax and promoting credit offtake to boost economic activity during the festive season amid a slowdown. The recent measures include the steepest cut in corporate tax, the rollback of enhanced surcharge on Foreign Portfolio Investors, and more to jump-start growth which hit a six-year low of 5% during the first quarter of the current fiscal.
The central bank had already slashed the repo rate four times before this, consecutively this year, amounting to 110 basis points in aggregate.
At its last meeting in August, the Monetary Policy Committee (MPC) reduced the benchmark lending rate by an unusual 35 basis points to 5.40%.
The RBI has been mandated by the government to ensure that inflation remains below 4%, with a deviation of 2% on either side.
Experts and industry feel low inflation provides enough headroom for the RBI to further lower the policy rate, especially when the festive season has just started. People make huge purchases during Navratras and Diwali.
Earlier, equity benchmark indices traded with healthy gains during early hours amid hopes of key interest rate cuts by the Reserve Bank of India (RBI). At 11:15 AM, the BSE S&P Sensex was up by 230 points at 38,336.93 while the Nifty 50 edged higher by 52.70 points to 11,366.
Read: The Fourth Bi-monthly Monetary Policy Statement, 2019-20, Resolution of the Monetary Policy Committee (MPC) of the Reserve Bank of India
(With agency inputs)
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