RBI cuts repo rate, slashes GDP growth estimates
On Friday, the six-member Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) cut the repo rate by 25 basis points to 5.15% in its "accommodative" stance to revive growth. With this revision, the RBI has slashed its repo rate for the fifth consecutive time this calendar year. The repo rate is the rate at which RBI lends short-term funds to commercial banks.
All committee members voted for repo rate cut
All members of the MPC voted in favor of slashing the repo rate by 25 basis points, barring Dr. Ravindra H. Dholakia who voted for a reduction of 40 basis points. The committee said, "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."
'MPC notes that the negative output gap has widened further'
The committee added, "The MPC notes that the negative output gap has widened further. While the recent measures announced by the government are likely to strengthen private consumption and spur private investment activity, the continued slowdown warrant intensified efforts to restore the growth momentum."
Reuters poll predicts another repo rate cut in December
Notably, in a late-September Reuters poll of over 50 economists, a majority predicted the 25-basis-point repo rate cut. The economists had also predicted another 15 basis points repo rate cut in December, taking the key rate to 5.0%. Separately, a Bloomberg poll of 33 economists also predicted a repo rate cut from 20 basis points to 40 basis points.
This year, RBI has cut repo rate by 135bps
The repo rate has been slashed to help reduce the borrowing costs for home and auto loans. Reportedly, with this Friday slice, the RBI has reduced the repo rate by 135 basis points (1.35%) in total the past year.
GDP outlook lowered to 6.1%
Furthermore, the RBI also lowered its Gross domestic product (GDP) growth projection from 6.9% in August to 6.1% in the second quarter of the FY20. GDP growth was also lowered to 6.6-7.2% for the second half of FY20. The RBI also revised inflation target upwards to 3.4% for the second quarter of FY20 while projections were retained at 3.5-3.7% for the second half of FY20.