The Reserve Bank of India on Wednesday maintained an accommodative stance on monetary policy, and said retail inflation would remain within targeted band. It also revised downwards real Gross Domestic Product growth for 2019-’20 mentioned in its June policy.
The central bank’s Monetary Policy Committee reduced the policy repo rate, or the interest rate at which it lends to commercial banks, under the liquidity adjustment facility by 35 basis points from 5.75% to 5.4% while the reverse repo rate was revised to 5.15%. The reverse repo rate is the rate at which the central bank borrows money from commercial banks. The marginal standing facility rate and the bank rate were changed to 5.65%. RBI Governor Shaktikanta Das said the repo rate cut was balanced and a reduction of 25 basis points would have been inadequate, PTI reported.
With this, the RBI has reduced the repo rate by 110 basis points since February. This is the fourth time this year that the central bank has cut the repo rate. The revision is likely to lower interest rates on new bank loans.
Meanwhile, the bank said retail inflation would remain within its target level in the next 12 months, and projected it to stay within 3.5% to 3.7% in the second half of the financial year. The Consumer Price Index retail inflation was projected at 3.1% for the second quarter of the financial year while CPI-based inflation in the first half of the next financial year was projected at 3.6%.
“Since the last policy, domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks,” said the Monetary Policy Committee. “Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish. Even as past rate cuts are being gradually transmitted to the real economy, the benign inflation outlook provides headroom for policy action to close the negative output gap.”
The bank said addressing growth concerns by boosting aggregate demand, especially private investment, should be the highest priority “at this juncture while remaining consistent with the inflation mandate”.
Real Gross Domestic Product growth for 2019-’20 in the committee’s June resolution was projected at 7%. “Various high frequency indicators suggest weakening of both domestic and external demand conditions,” said the Reserve Bank of India, adding that it had revised the projection downwards to 6.9%.
“The MPC judged that with inflation projected to remain within the target, addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture,” RBI Governor Shaktikanta Das told reporters.
Das said the government will come up with more measures to revive economic growth. It had dropped to a five-year low of 5.8% for the March quarter and is expected to slip further in the June quarter.
Meanwhile, the rupee slipped towards the level of 71 against the US dollar after the central bank’s decision. The rupee had opened on a weak note at 70.92 at the interbank forex market and then fell to 70.99 before recovering. It was trading at 70.67 at 12.45 pm.
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