The Reserve Bank of India (RBI) reduced the repo rate or the rate at which it lends to banks by 35 basis points to 5.4 percent in the August policy review, citing downside risks to economic growth.
The reverse repo rate has been revised to 5.15 percent while the marginal standing facility rate and the bank rate to 5.65 percent. The Monetary Policy Committee (MPC) has maintained an accommodative stance.
“Addressing growth concerns by boosting aggregate demand, especially private investment assumes the highest priority at this juncture while remaining consistent with the inflation mandate,” the RBI said on August 7. The central bank also cut its FY20 economic growth outlook to 6.9 percent from 7 percent in the June policy review.
This is the fourth consecutive rate cut since February. The central bank has lowered the key policy rate by a cumulative 110 basis points in the current easing cycle. The move was in line with market expectations though there were hopes that the RBI may deliver a steeper cut to boost growth.
Also, this is the first time ever that the central bank has gone with an unconventional measure instead of the usual practice of using multiples of 25. The change was suggested by RBI Governor Shaktikanta Das earlier this year.
RBI said that four members of MPC, including Governor Das, voted in favor of 35 basis points cut while two voted for 25 basis points cut.
The rate cut is expected to further bring down interest rates on home loans and auto loans as the monetary transmission of previous policy easing have been limited. It will also help boost credit growth in the banking system.
RBI said that the inflation is projected to remain within target over a 12-month horizon and it provides headroom for policy action to close the negative output gap.
The easing comes after the country’s FY20 growth projection saw a series of downward revisions. On August 1, CRISIL ratings revised India’s FY20 growth estimate downwards, from 7.1 percent to 6.9 percent, based on factors like a weak monsoon, slowing global growth and sluggish high-frequency data for the first quarter. Last month, the International Monetary Fund also cut its India growth projection by 30 basis points to 7 percent citing weaker-than-expected outlook for domestic demand. The IMF also cut its forecast for world economic growth by 10 basis points to 3.2 percent in 2019.