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RBI lowers repo rate by 35 basis points to 5.40%

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All six members of the Monetary Policy Committee voted in favour of the rate cut.

The Reserve Bank of India has decided to lower interest rate for the fourth consecutive policy review as it reduced repo rate by 35 bps to 5.40%.

All six members of the Monetary Policy Committee (MPC) voted in favour of the rate cut. The MPC noted that inflation is currently projected to remain within the target.

“Since the last policy, domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish. Even as past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap. Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate,” RBI said.

Governor Shaktikanta Das on Wednesday termed the steeper cut as a “balanced” call given the domestic and global developments.

He explained that a 0.25 percentage points reduction, as it has done thrice this year since February, would have been “inadequate”, while a 0.50 percentage points cut would have been “excessive”.

Mr. Das said the RBI has been pre-emptive in its actions on rates and the policy stance through the year and has also provided adequate liquidity to the system always.

Addressing the media at the customary post-policy presser, Mr. Das said there is nothing sacred about multiples of 0.25 percent cuts and also made it clear that the rate call cut has not been taken on “gut feel” but on hard data.

“Too much should not be read into it, it is judgement call which the MPC has taken,” he said, adding that it was “prudent” to be accommodative.

The RBI will ensure that there is sufficient liquidity is available for the economy.

Expressing satisfaction on the transmission process by saying that the financial markets have fully absorbed the benefits of the three past rate cuts and expressed confidence that there will be more rate cuts in the future by the banks.

Mr. Das said the decision of the MPC is its “own autonomous, independent decision”.

To a question on real interest rates and the levels which the central bank is targeting, he said this is not the right time to look at that aspect as the RBI focus is to meet the output gap.

Highlights

* RBI cuts key interest rate (repo) by an unusual 35 basis points (0.35 percentage points) to 5.40 per cent.

* Reverse repo rate has been revised to 5.15 per cent

* The marginal standing facility (MSF) rate and bank rate stands at 5.65 per cent

* Maintains the accommodative policy stance

* Cuts GDP forecast to 6.9 per cent for the current fiscal from 7 per cent in June policy

* Keeps retail inflation forecast within target of 3.5-3.7 per cent for second half of 2019-20

* Four members voted for cut of 35 basis points in rate; two members voted for 25 basis points rate cut

* Boosting aggregate demand, private investment assume highest priority

* Next monetary policy statement on October 4.

Source – The Hindu

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