India's central bank cuts rates again

Monetary policy review RBI set to cut rate. Question is by how much

RBI cuts repo rate from 5.40% to 5.15%; GDP outlook for 2019-20 revised to 6.1%

The reduction in key policy rate by the RBI is expected to revive investment and encourage consumption, thereby kick-starting the sluggish economy, India Inc said on Friday.

The reverse repo rate - the interest rate the central bank pays commercial lenders for taking short-term deposits - was reduced to 4.9 percent. Last month, the RBI took the rare step of limiting withdrawals from PMC, causing depositors to besiege the bank's branches to retrieve their money.

Given that the 110 bps rate cut so far has not quite led to the uptick in investment, one can look upon the series of rate cuts as being work in progress to lower the cost of capital gradually over time so that when the investment cycle looks to pick up, potential investors would be comfortable with the rate regime. The last time the Governor went in for 35 basis point (bps) cut, which was non-conventional and had popped up the choice between 25 bps and something more this time around.

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Analysts said more rate cuts could be on the cards in December as officials try to ramp up rural consumption and economic activity.

While admitting that India was facing a big economic slowdown, RBI also revised the gross domestic product (GDP) growth for 2019-20 downwards from 6.9 per cent in the August policy to 6.1 per cent. After this reduction of 25 basis points (bps), which overall translates into 135 bps or 1.35 percentage points this year, the repo rate now stands at 5.15 per cent.

"With current inflation remaining benign, we expect RBI to opt for a 40 bps rate cut at its policy review later this week in a bid to continue its support toward growth revival", said Yuvika Oberoi, an economist with Yes Bank in Mumbai.

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The economy expanded by just 5% in the June quarter, its slowest pace since 2013, on the back of low consumer demand and a slowdown in government spending amid global trade frictions.

All members of the six-member monetary policy committee voted for a rate cut. It is likely that banks maybe forced to cut lending rates going forward.

Today's action by the RBI may help to reduce lending rates by banks, which means loans on auto, gold and personal loans could fall, provided the banks transmit the same.

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