On Thursday, the Reserve Bank of India (RBI) cut main interest rates by 25 basis points (bps), its third decrease this year, attempting to lift the economic growth slowdown and increase consumer spending.
The move comes two weeks after the parliamentary elections that saw the National Democratic Alliance (NDA) led by Bharatiya Janata Party (BJP) return to power for the second term with Prime Minister Narendra Modi at the helm.
The Monetary Policy Committee (MPC) of RBI lowered the repo rate from 6% to 5.75%. Repo rate is the rate at which the apex bank provides commercial banks with short-term cash. A one-hundredth of a percentage point is a basis point.The Monetary Policy Committee (MPC) of RBI lowered the repo rate from 6% to 5.75%. Repo rate is the rate at which the apex bank provides commercial banks with short-term cash. A one-hundredth of a percentage point is a basis point.
RBI’s move signals that it focuses on promoting development with the goal of attaining the inflation target in the medium term. The rate cut comes at a moment when development is slowing down in the Indian economy.Growth in gross national product (GDP) fell to 5.8% for the fourth quarter of FY19. The economy’s annual development slowed to a 5-year low of 6.8% in FY19.
RBI stated that the impact of recent policy rate cuts and normal moonsoon expectations in 2019 has been revised to 3.0-3.1 percent for H1:2019-20 and 3.4-3.7 percent for H2:2019-20, with widely balanced hazards. For FY20, the RBI has amended GDP development from 7.2% to 7%.
RBI has decreased 75 bps this year with the present rate cut. Therefore, there are strong expectations that banks will pass on the rate cut by reducing their loan prices and potentially reducing the equated monthly installments (EMI) that people pay on home and consumer loans.
However, the rate cut transmission was slow. According to Care Rating, although in February and April the MPC decreased policy prices by 50 bps The average MCLR decreased from 8.8% in January to 8.74% in April, implying a transmission of only 6 bps in the following three months after the first repo rate cut. However, the RBI stated in its policy declaration that the transmission in February and April 2019 of the cumulative 50 bps decrease in the policy repo rate was 21 bps to the weighted average loan rate (WALR) on new rupee loans.
All MPC participants unanimously decided to decrease the policy repo rate from neutral to accommodative by 25 grounds and alter the monetary policy position.