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Thu 6 Jun 2019 12:00 PM

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India's RBI cuts repo rate, announces 'accommodative' policy stance

The move marks the third consecutive cut in interest rates effected by the RBI this calendar year.

India's RBI cuts repo rate, announces 'accommodative' policy stance

The Reserve Bank of India (RBI) announced a 25 basis point in the country’s repo rate to 5.75 percent, in line with market expectations. 

The move marks the third consecutive cut in interest rates effected by the RBI this calendar year. 

Repo is the rate at which the central bank lends to commercial lenders. The cut signals a drop in the cost of funds for corporate and individual borrowers, although Indian banks have been found reluctant in passing on the benefits of the earlier rate cuts. 

In its first meeting since the newly re-elected government of Narendra Modi assumed office last week, the RBI’s Monetary Policy Committee has also changed its policy stance to ‘accommodative’. It had previously adopted a ‘neutral’ stance. 

In contrast to previous occasions when the committee voted 4-2 on the rate cut, in this instance the MPC decision was unanimous on its rate cut and policy stance decisions. 

Economists and market analysts have been expecting a 25 to 50 basis point cut in policy rate by the RBI, in view of faltering economic growth in recent quarters. 

India is one of a number of Asian central banks shifting to looser monetary policies to boost their economies amid global uncertainties, recently exacerbated by the risks of a US-China trade war. 

The Philippines, Malaysia and New Zealand eased their monetary policy rates last month, while Australia cut interest rates this week for the first time in almost three years. 

Additionally, the MPC revised india’s GDP growth for FY20 down to 7 percent from 7.2 percent in the April policy. It sees growth in the range of 6.4 to 6.7 percent in the first half of the financial year and 7.2 to 7.5 percent in H2. 

“Weak global demand due to esclation in trade wars may further impact India’s exports and investment activity,” the RBI said in a statement. “Further, private consumption, especially in rural areas, has weakened in recent months.” 

The statement, however, said that an uptick in business expectations in Q2, coupled with political stability, buoyant stock market conditions and higher financial flows will provide a boost for investment activity. 

RBI Governor Shaktikanta Das said that there has been a 75 basis point cut in the repo rate this calendar year and that the central bank expected a ‘higher and faster  transmission of rate cuts by banks going forward’, adding that the transmission rate of rate cuts by banks has been around 31 percent. 

Many bankers, however, still are reluctant to pass on the benefit of rate cuts to their customers due to factors such as high interest rates on deposit rates and liquidity related issue. 

Bankers, however, still seem to be reluctant in passing on the benefits of rate cut to their customers due to factors such as high interest rates on deposit rates and liquidity related issues.  

“For banks to cut their interest rate, they need to bring down their deposit rates first,” said Uday Kotak, MD of the private sector Kotak Mahindra Bank. “With interest rates offered by the governments on small saving schemes remaining above 8 percent, banks find it difficult to cut interest rates in their deposits.”

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