India’s Reserve Bank Monetary Policy Committee (MPC) concluded its second bi-monthly monetary policy meeting for 2019-20 with unanimous decisions beneficial to the economy. The committee decided on a 25-basis point cut in the policy repo rate, shifting the monetary policy stance from ‘neutral’ to ‘accommodative’, a considerable move towards promoting economic growth. This third consecutive rate cut by the six-member MPC panel represents a historical cycle not seen since 2013.
New Repo Rate and Other Adjustments
Following the timely MPC decision, the repo rate has been adjusted to 5.75% from the previous 6%. This reduction is a strategic effort aimed at stimulating economic activity which has seen significant deceleration, notably in the January-March quarter of the year. The reverse repo rate within the LAF (liquidity adjustment facility) is now set at 5.50%, with the Marginal Standing Facility (MSF) rate and the bank rate both adjusted to 6.0%. This will ensure adequate liquidity within the economic system necessary for all productive purposes.
The Revised GDP Growth
The MPC also addressed the Gross Domestic Product (GDP) forecast, revising the anticipated growth for 2019-20 downwards to 7% from the initially projected 7.2% based on the April policy report. This revision underlines the need for the accommodative monetary policy stance aimed at reigniting economic growth.
Reasons Behind The Rate Cut
The MPC’s decision to reduce the repo rate is influenced by a number of key factors. Among them — the weakening of economic growth as indicated by the widening output gap between actual and potential output compared to the April 2019 report. An accommodative stance implies that the possibility of a rate increase is currently off the table, providing comforting news to market players concerned about the slowdown. Furthermore, this rate cut will effectively impact consumer loans such as those for consumer durables and two-wheelers.
Effects on Inflation
Inflation dynamics have played a considerable role in this decision. The headline inflation trajectory remains below the target, even after considering the transmission of the previous two policy rate cuts. Consequently, this provides room for the MPC to address growth concerns through efforts aimed at boosting aggregate demand, particularly geared towards reinvigorating private investment activity whilst remaining consistent with the flexible inflation targeting mandate.
Table of Changes
| Policy | Old Rate | New Rate |
|---|---|---|
| Repo Rate | 6% | 5.75% |
| Reverse Repo Rate | 5.75% | 5.50% |
| MSF Rate and Bank Rate | 6.25% | 6.0% |
| GDP Growth | 7.2% | 7% |
Additional MPC Decisions
Apart from monetary policy adjustments, the RBI announced that charges on Real-Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) transactions will be dropped, obligating banks to pass on this benefit to customers. Furthermore, RBI has made plans to establish a committee, involving all stakeholders, under the chairmanship of the CEO Indian Banks’ Association (IBA), to scrutinize the entire assortment of ATM charges and fees.