Amid weak domestic and demand conditions, RBI also cut its economic forecast to 6.9 per cent for 2019-20.

EMIs set to come down as RBI cuts repo rate by 35 basis pointsImage: Picxy.com
Money Economy Wednesday, August 07, 2019 - 13:27

The Reserve Bank of India on Wednesday broke-away from convention to reduce key lending rates by 35 basis points to 5.40 per cent.

Historically, the central bank has been either reducing or increasing rates in the multiples of 25 basis points.

Acknowledging the change, RBI Governor Shaktikanta Das answering a question in the post policy press interaction, defended the decision to reduce the rate to 35 basis points and stated that there is nothing "sacrosanct" in manoeuvring the policy in the multiples of 25 basis points.

Das added that that MPC found 35 basis points as sufficient for the time period. 

On Wednesday, the RBI's monetary policy committee (MPC) in its third policy review of the current fiscal reduced the repo, or short term lending rate for commercial banks, by 35 basis points to 5.40 per cent from 5.75 per cent.

Consequently, the reverse repo rate was revised to 5.15 per cent, and the marginal standing facility (MSF) rate and the bank rate to 5.65 per cent.

Economic forecast

Amid weak domestic and demand conditions, RBI cut its economic forecast to 6.9 per cent for 2019-20.

The RBI's monetary policy committee (MPC) in its third policy review of the current fiscal reduced the growth rate to 6.9 per cent from 7 per cent in FY2019-20.

In the June resolution, MPC had projected the real GDP growth for 2019-20 at 7 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.

Besides, the GDP growth for the first quarter of FY2020-21 is projected at 7.4 per cent.

"Various high frequency indicators suggest weakening of both domestic and external demand conditions," the MPC said in a statement.

"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." 

However, MPC said that 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 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...," the statement said. 

Stock market reaction

Sensex and Nifty mostly stayed on usual course post RBI fourth consecutive rate cut amid a massive slowdown in the Indian economy.

The benchmark Sensex at 12.13 p.m., was trading 28.61 points at 37,005.46, while the broader Nifty was down 4.05 points at 10,944.20.

"The downward revision of the FY 20 GDP growth rate to 6.9 per cent with downward risk is a dovish signal," said V.K. Vijayakumar Chief Investment Strategist at Geojit Financial Services. 

On the financial market performance off-late the RBI said that they were driven by the monetary policy stances of major central banks and intensifying geo-political tensions. 

"In the US, the equity market recovered most of the losses suffered in May, boosted by dovish guidance by the US Fed and some transient respite in trade tensions with China," the central bank said.

It further said that the emerging markets stocks lagged behind their developed market counterparts, mainly reflecting the weak performance of Chinese and South Korean stocks. 

At 12.26 p.m., the rupee was trading at Rs 70.78 to a US dollar from its previous close of 70.82.

RBI on the currency markets, said that the US dollar weakened against major currencies in June on dovish guidance by the US Fed but appreciated in July.

Emerging markets economy (EME) currencies, which traded with an appreciating bias in July, depreciated in early August on escalation of trade tensions, the RBI added.

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