The six-member monetary policy committee(MPC) of the Reserve Bank of India (RBI) on Wednesday cut repo rate by 35 basis points in its third bi-monthly policy review of the financial year. It was fourth rate cut by the central bank in a row. The short-term lender rate now stands at 5.40 per cent.
Persistent weakening of core inflation has kept the headline rate below the central bank’s 4 per cent target for the 11th straight month in June and, thus, the rate cut was largely in line with Street expectations.
RBI had cut the policy rate by 75 basis points prior to this, through three rate cuts of 25 bps each in February, April and June. Wednesday’s rate cut increased the tally to 110 basis points.
The central bank has maintained its accommodative stance on the policy.
The rate cut has sent a strong signal to domestic banks to cut lending rates before the busy festive season kicks off in September.
Heading into the event, analysts had suggested the need for a 50 basis points rate cut, but said Governor Das’ July interview where he had talked about a 25 bps equivalent of easing due to RBI’s accommodative stance suggested the central bank would not be as aggressive.
Analysts says a revival in monsoon has dampened agflation fears, as it halved seasonal rainfall deficit to 7 per cent of normal from 14 per cent on July 28. Besides, an escalation in the US-China trade war has raised growth risks. Various high-frequency indicators suggest the domestic slowdown may persist over the next couple of quarters, BofA-ML said in a note.
In addition, “Global rates are cycling down on the Fed’s July 31 rate cut. Oil and commodity prices are also slipping on global uncertainty. The domestic inflation outlook remains benign: we track July inflation at 3 per cent well within the RBI’s 2-6 per cent mandate,” the BofA-ML said.
The economy is facing significant domestic and external headwinds as accentuated by the various indicators such as growth of eight core industries decelerating to a four-year low; plunging sales in the automobile sector; the slackening of investment activity; and the likelihood of exports getting impacted due to the global economic slowdown, Centrum Broking said.
“India’s real interest rates still remain higher than most other countries, which is not beneficial for an economy experiencing slowdown,” it said before the RBI policy review.