India Cuts Rate By 25 Bps For Third Time

India Cuts Rate By 25 Bps For Third Time

June 13, 2019

India’s central bank resorted to a quarter-point reduction in interest rate on Thursday, the third in a row, that took it to the lowest level since 2010, and tweaked its stance of monetary policy to accommodative from neutral.

Citing weak growth impulses, policymakers of the Reserve Bank of India unanimously decided to slash the repo rate by 25 basis points to 5.75 percent from 6.00 percent.

Consequently, the reverse repo rate was adjusted to 5.50 percent.

The bank had earlier reduced its rates twice this year, in February and April.

At its second bi-monthly meeting in the financial year starting April, the six-member Monetary Policy Committee, headed by RBI Governor Shaktikanta Das, unanimously decided to change the policy stance from neutral to accommodative, indicating more easing in near-term.

Aggressive loosening will be a mistake, Shilan Shah, an economist at Capital Economics, said.

With a growing perception that the RBI’s credibility as an inflation fighter is being eroded, further policy loosening raises the risk that inflation rebounds and ultimately requires interest rates to be higher over the longer term, Shah added.

The monetary policy committee said a sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern.

Even after two rate cuts, the committee observed scope to accommodate growth concerns as the headline inflation trajectory remains below the target. The action is expected to help boosting aggregate demand and reinvigorate private investment activity.

The bank lowered its GDP growth outlook to 7 percent from 7.2 percent for the financial year 2020 on weak domestic investment activity, escalating trade wars weighing on exports, and weak private consumption.

Further, taking into account the impact of rate cuts and expectations of a normal monsoon, the bank revised down the path of CPI inflation to 3.0-3.1 percent for the first half of the fiscal 2020 and to 3.4-3.7 percent for the second half.

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