(MPC), on Friday, cut key repo rate by 25 basis points (bps) to 5.15 per cent, in its fourth bi-monthly
review meeting. Consequently, the reverse repo rate stands at 4.9 per cent. The cut, a fifth in a row, was voted by a 5:1 majority.
With this, the RBI has cut rate repo rate by 135 bps in 2019.
In a Bloomberg survey, all the analysts predicted a rate cut. The quantum, however, ranged between 25-40 bps.
Reacting to the move, benchmark indices slumped soon after the policy decision as RBI governor Shaktikanta Das voiced concerns over economic slowdown. The RBI cut FY20 gross domestic product (GDP) to 6.1 per cent from 6.9 per cent.
Here are the key highlights from the October MPC meeting
The RBI revised the real GDP to 5.3 per cent in Q2FY20 and in the range of 6.6-7.2 per cent for H2FY20. The central bank, also, negatively revised the GDP growth for Q1FY21 to 7.2 per cent.
“Various high frequency indicators suggest that domestic demand conditions have remained weak. The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q3,” the RBI said in its policy statement.
India’s GDP growth fell to a six-year low of 5 per cent in the June quarter on the back of muted private consumption, deceleration in manufacturing activity and stagnant growth in the services sector.
Going ahead, the bank foresees weak business as well as personal consumption activity due to dismal sentiment.
“The RBI’s business assessment index (BAI) fell in Q2FY20 due to a decline in new orders, contraction in production, lower capacity utilisation and fall in profit margins of the surveyed firms… (Furthermore) The consumer confidence survey shows weak consumer sentiment and tepid consumption demand, especially relating to non-essential items. Manufacturing firms see weakening of demand conditions in Q2:2019-20 and Q3 and expect their output prices to soften, going forward, as the cost of finance and salary outgoes remain muted,” it said.
Citing geo-political uncertainties and elevated food prices, the RBI revised inflation projection upward to 3.4 per cent for Q2FY20, while projections were retained at 3.5-3.7 per cent for H2FY20 and 3.6 per cent for Q1FY21. The RBI, in its policy stance, proposed to use “flexible inflation trajectory” to “reinvigorating domestic demand”.
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Four factors impacting inflation: First, the outlook for food inflation has improved considerably since the August bi-monthly policy. Kharif production is estimated at close to last year’s level, auguring well for the overall food supply situation. Vegetable prices may remain elevated in the immediate months but are likely to moderate as winter supplies enter the market. Prices of pulses are expected to remain contained by adequate buffer stocks.
Second, forward looking surveys conducted by the Reserve Bank point to weak demand conditions persisting, with indications of softening of output prices in Q3:2019-20. Accordingly, price pressures in CPI excluding food and fuel are likely to be muted.
Third, crude oil prices may remain volatile in the near-term; while global demand is slowing down, the persisting geo-political uncertainties pose some upside risks to the inflation outlook.
three-month and one-year ahead inflation expectations of households polled by the Reserve Bank have risen in the current round reflecting near-term price pressures. Finally, financial markets remain volatile with currencies of several emerging market economies trading with a depreciating bias in the recent period.
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Why 25 bps? Explaining why the MPC decided to cut rates by 25 bps as against market expectations of 40 bps, the governor explained that the central bank “wanted to wait and see the impact of 135 bps cut so far in 2019”.
“A 40-50 bps would have been commensurate along with a dovish guidance. However, small but continuous rate cuts will ensure that the repo-linked loans transmit the cuts fully as most banks are yet to introduce the relevant products. It is possible that the MPC weighed the merits of transmission mechanism versus front-loading of rate cuts while deciding on the quantum of rate cut,” Kotak Securities noted.
Global economy: The MPC, in its statement, noted that the global economy has weakened further since the last policy meeting.
“Heightened uncertainty emanating from trade and geo-political tensions continues to cloud the outlook. Among advanced economies (AEs), the slowdown in the US economy in Q2:2019 appears to have extended into Q3:2019, weighed down by softer industrial production,” it said. Consequently, economic data for emerging markets were likely to be bogged down by the deteriorating global environment.
NEFT to be made 24x7:
The RBI, while announcing the repo rate decision, also clarified that the NEFT facility will be made available 24x7 on all working days starting December 2019.
Increased eligibility, lending limits for NBFC-MFI borrowers:
The RBI, on Friday, increased household income limit for borrowers of Non-banking finance company-Microfinance Institutions (NBFC-MFIs) to Rs 1.25 lakh for rural areas and Rs 2 lakh for urban and semi-urban areas. Earlier, the limits were set at Rs 1 lakh and Rs 1.6 lakh, respectively. Moreover, the lending limit has been increased to Rs 1.25 lakh from Rs 1 lakh per eligible borrower.
The central bank will issue detailed guidelines shortly.