Changing its monetary policy stance from neutral to accommodative, the Reserve Bank of India has slashed the repo rate by 25 basis points to 5.75% from 6%. “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,” the statement released by the RBI said. Earlier, the Reserve Bank of India had reduced the repo rate by 25 basis points each in its February and April policy reviews. What is worrisome for the economist is that the Central Bank has also taken into account the current slump in the economy. The RBI, while announcing the repo rate cut, also lowered the GDP growth forecast for 2019-20 to 7 per cent from 7.2 per cent.
However, the RBI marginally increased its inflation projection to 3-3.1 per cent for the first half of the fiscal year 2019-20, which is within the comfort range of 2-6 per cent set by the government. "The MPC (monetary policy committee) notes that growth impulses have weakened significantly. A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern," read the policy resolution. With this move, the home loans will get cheaper.
“The headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts. Hence, there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate,” the statement added.
The RBI report comes amid growing concerns of slump in the economy. Recently, the government data released said that India's economic growth rate slowed to five-year low of 5.8 per cent in January-March 2018-19, due to poor performance in agriculture and manufacturing sectors. The Central Statistics Office (CSO) also revealed that GDP growth during 2018-19 fiscal stood at 6.8 per cent, lower than 7.2 per cent in the previous financial year.
The growth in gross domestic product (GDP) was slowest since 2014-15. The previous low was 6.4 per cent in 2013-14. The fourth quarter growth was below China's 6.4 per cent. The official data also states that India's unemployment rate rises to 45-year high of 6.1 per cent in 2017-18.