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RBI Cuts Repo Rate By 35 bps to 5.40%; Flags Growth Worries

This is the fourth consecutive rate cut since February.


The Reserve Bank of India (RBI) on August 7 cut the repo rate—its key lending rate—by 35 basis points to 5.40 percent and kept the door open for lowering rates further by retaining an “accommodative” policy stance, but flagged worries over weakening growth prospects.
This was the fourth repo rate cut in as many policies since February 2019. This is also the first time when the benchmark lending rate has been changed by range other than multiples of 25 basis points. This signals a major departure from the prevailing practice, when the central bank had only lowered or raised rates in multiples of 25 basis points.
“There is nothing sacrosanct about 25 basis points or its multiples thereof,” RBI governor Shaktikanta Das said during the post-policy press conference.
One basis point is one-hundredth of a percentage point.
The six member Monetary Policy Committee (MPC), headed by Das, however, saw emerging worry lines on the broader economy’s growth prospects, punched by sluggish consumption and investment activity.
The RBI now expects India’s real or inflation-adjusted gross domestic product (GDP) to grow at 6.9 percent in 2019-20, lower than 7 percent it had projected in June.
“Various high frequency indicators suggest weakening of both domestic and external demand conditions. The Business Expectations Index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q2 (July-September), although a decline in input costs augurs well for growth,” the RBI’s monetary policy statement said.
Muted household spending as reflected in metrics such as falling car sales have resulted in a pile up of unsold inventories and rising unused capacities in factory plants mirror slackening demand and feeble investment.
With inflation decisively tamed for the next 12 months, the RBI appears to have indicated a change in its focus to aid investment revival.
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