RBI rate cut to complement government’s measures to boost growth: Finance Ministry

Rate-Sensitive Shares Gain Ahead Of RBI Monetary Policy Decision

India cuts rates for 5th time amid economic slowdown, banking woes

A repo rate cut allows banks to reduce interest rates for consumers and lowers equal monthly instalments on home loans, vehicle loans and personal loans.

As a result of the rate cut, the reverse repo rate under the liquidity adjustment facility (LAF) is now 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate will be 5.40 per cent, RBI Governor Shaktikanta Das said.

Also, RBI's revision of real GDP growth for FY20 downwards to 6.1 percent from 6.9 percent in the August policy and upward revision in CPI inflation projection slightly upwards to 3.4 percent for Q2 FY20 from 3.1 percent earlier spooked investors.

Equated monthly instalments on retail loans, such as home and auto loans, as well as credit to micro, small and medium-sized enterprises will become cheaper as banks have linked those loans to the repo rate, following a regulatory order.

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A slowdown in global as well as the domestic economy is the main reason behind the rate cut with the RBI stating "the MPC also made a decision to continue with an accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target". However, global brokerages said the dovish tone of the central bank has kept the room open for further easing.

As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps. "Another rate cut of 25 bps is likely in December policy", Citi said.

That has raised expectations the RBI will be forced to further downgrade its growth projection of 6.9 percent for the current fiscal year.

The government has taken a slew of measures since August 23 to pull the economy out of a six-year low growth and a 45-year high unemployment rate by reviving private investments.

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The RBI is also facing mounting problems in the banking system, which could further hurt lending in the economy.

It also kept its stance as accommodative. While five members voted for a 25 bps cut, Ravindra Dholakia voting for a 0.40 per cent reduction.

On reviving growth, the MPC welcomed the recent moves by the government as the ones in the right direction, but the resolution did not have any reference to the fiscal deficit or fiscal management, which is generally deemed to have an inflationary impact.

On the farm sector, the MPC resolution said, "prospects of agriculture have brightened considerably, positioning it favourably for regenerating employment and income, and the revival of domestic demand". "It would be consistent with our forecasts of an additional rate cut by the (US) Fed in October", Goldman Sachs said in a report post Friday's decision.

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