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Last Updated : Oct 04, 2019 02:55 PM IST | Source: Moneycontrol.com

RBI cuts repo rate to 5.15%, lowest in 9 years; FY20 GDP growth estimates slashed to 6.1 percent amid weak demand

The MPC hints at more rate cuts in the coming months to help the economy gather pace as inflation remains firmly bottled up

Parnika Sokhi @ParnikaSokhi

The Reserve Bank of India (RBI) on October 4 cut the repo rate — its key lending rate — by 25 basis points to 5.15 percent, triggering hopes for cheaper loans during the festival season, but sharply lowered the economy's growth projections amid persistent slowdown in household spending.

The repo rate, the rate at which banks borrow from the RBI, is now at its lowest level in nine years, aided by the fifth rate cut in as many monetary policies since February 2019.

The lower repo rate has raised hopes of bringing down EMIs for the millions of borrowers as well cut capital raising costs for corporates, with banks expected to pass on the reduced rates by slashing lending rates for its customers.

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The six-member Monetary Policy Committee (MPC), headed by RBI governor Shaktikanta Das, however, struck a stridently bearish note on the broader economy.

The MPC also made it abundantly clear that at this point in time, it stood firmly on the side of growth in the inflation control versus revival contest, strongly hinting at more rate cuts to help the economy gather pace.

"There is a policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate. It is in this context that the MPC decided to continue with an accommodative stance as long it is necessary to revive growth, while ensuring that inflation remains within target," the MPC statement said.

India's gross domestic product (GDP), according to the MPC's latest projections, is set to grow at 6.1 percent in 2019-20, significantly lower than the 6.9 percent growth estimates it had put out in the previous policy in August.

The RBI placed the onus squarely on the government, obliquely suggesting that more policy measures were needed to engineer a quick turnaround in the Indian economy that has seen its growth rate slump to 5 percent in April-June.

"While recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore growth momentum," it said.

In a mini-budget of sorts, Finance Minister Nirmala Sitharaman on September 20 announced major changes in corporate income tax rates to revive growth in the broader economy.

The government has slashed the corporate income tax rate from 30 percent to 22 percent for all companies. Inclusive of cess and surcharges the effective corporate tax rate in India now comes down to corporate tax to 25.17 per cent.

Newer companies, which are set up after October 1, 2019, will be subjected to an even lower effective tax rate of 17 percent.

These were by far the biggest, and the boldest, step to revive the Indian economy, which until recently, was feted as a global growth engine. The goal is to turn India into an investors' darling, demonstrate the government’s intent to walk the talk on economic management, restore investors’ confidence and boost sentiments and demand.

The earliest markers of an economy's health are found in car showrooms, retail malls and the rapidity of activity in farms. Recent months’ data related to these would suggest that the Indian economy is going through a bumpy ride, an aspect that the MPC has clearly underlined in its latest assessment.

The central bank's latest consumer confidence survey shows weak sentiment and tepid consumption demand, especially in non-essential items.

Manufacturing firms also see weakening of demand conditions during July-December and expect their output prices to soften as cost of finance and salary outgoes remain muted.

"Various high frequency indicators suggest that domestic demand conditions have remained weak. The business expectations index of the Reserve Bank's industrial outlook survey shows muted expansion in demand conditions in Q3 (October-December)," the statement said.

Export prospects have been impacted by slowing global growth and continuing trade tensions, it said.

GDP growth is projected to improve slightly to 5.2 percent in July-September, the RBI projected, but may pick up speed in the later months.

The RBI has estimated that GDP will grow at 6.6-7.2 percent in the second half (October-March) 2019-20 and 7.2 percent in April-June 2020.

Plentiful summer rains bodes well for the agriculture sector that can potentially lead the economy’s revival. "Overall, the prospects of agriculture have brightened considerably, positioning is favourably for regenerating employment and income, and the revival in the domestic demand," it said.

The government's measures and the rate cuts since February 2019 are expected to feed into the real economy and boost demand gradually, the RBI said.

All members of the MPC voted to reduce the policy repo rate and to continue with the accommodative stance of monetary policy. Chetan Ghate, Pami Dua, Michael Debabrata Patra, Bibhu Prasad Kanungo and Das voted to reduce the repo rate by 25 basis points. Ravindra H. Dholakia voted to reduce the repo rate by 40 basis points.

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First Published on Oct 4, 2019 11:48 am
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