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RBI Monetary Policy: Repo rate cut by 25 basis points; loans to get cheaper

As per expectations, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) on Friday cut the key repo rate by 25 basis points to 5.15 per cent -- its fifth straight cut this year -- and maintained its 'accommodative' stance. "The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target," says the MPC report.

The MPC noted the "negative output gap has widened further. While the recent measures announced by the government are likely to help strengthen private  consumption and spur private investment activity". All six members of the MPC voted to reduce the policy repo rate and to continue with the accommodative  stance  of monetary policy.

The central bank, which in its August MPC meet had predicted GDP growth of 6.9 per cent in FY20, revised its forecast to 6.1 per cent. The RBI's projection of 5.8 per cent for the first quarter went horribly wrong when India registered six-year low of 5 per cent GDP. The reverse repo rate has also been reduced to 4.90 per cent, and the marginal standing facility rate and the bank rate to 5.40 per cent, said the RBI.

Inflation, however, remains well within the RBI's range of 4(+/-2) per cent. "These decisions are in consonance with the objective of achieving the medium-term  target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," says the MPC report, adding the inflation was seen below 4 per cent in the rest of the financial year and early months of FY21.

During his press conference, RBI Governor says: "Since the MPC's last meeting in August 2019, global economic activity has weakened further. Heightened uncertainty emanating from trade and geo-political tensions continues to cloud the outlook. Among advanced economies, the slowdown in the US economy in Q2 appears to have  extended into Q3, weighed down by softer  industrial production."

Motilal Oswal, Managing Director at Motilal Oswal Financial Services said, "RBI has cut policy repo rates by 25 bps to 5.15% but the issue is transmission of these rates into the system. RBI has been asking banking system to offer loans at a level that reflect the benchmark cut, but the system is reluctant to pass on, due to risk aversion. Equity markets are cautious and watchful about the earnings season which at this juncture looks less enthusiastic. There is a possibility that equity markets will trade cautious and range bound. In medium to long term, I see good investment opportunity in equities." 

In its August MPC meet, the RBI had surprised everyone by going for a 35-basis-point cut to 5.40 per cent. The apex bank's decision to cut the repo rate further seems to be in sync with the government's recent measures, including a reduction in the corporate tax, to promote credit offtake to boost economic activity during the festive season amid the ongoing slowdown.

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