The Reserve Bank of India on Wednesday slashed the repo rate by 35 basis points to 5.40 per cent. Maintaining accommodative stance for monetary policy, the RBI said that inflation will remain within targeted band. Amid slowdown woes and liquidity crunch, the RBI trimmed the GDP growth forecast for current fiscal to 6.9 per cent from 7 per cent previously predicted.
Noting that inflation is currently projected to remain within the target over a 12-month ahead horizon, the MPC said since the last (June) policy, domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. It said that even as the 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.
This is the fourth consecutive time that the RBI has reduced repo rate. In the earlier three policies, it has reduced repo rate by 25 basis points each. The RBI also revised real GDP growth for 2019-20 downwards to 6.9 per cent from 7 per cent in the June policy. CPI inflation is projected at 3.1 per cent for the second quarter of FY20 and 3.5-3.7 per cent for second half of FY20, with risks evenly balanced.
Earlier, industry body CII in a statement said the central bank started its interest rate easing cycle in February 2019, taking cognizance of the headwinds to growth and inflation reading remaining below the RBI's target of 4 per cent. However, the transmission of the rate-cuts to the end-consumers has remained very gradual and relatively lower than the repo rate revisions, it said. The CII said the RBI should cut cash reserve ratio (CRR) by 50 bps which will release around Rs 60,000 crore into the system. "This along with infusing liquidity in the banking system will also reduce the burden on banks' resources, given the fact that currently, the credit-deposit ratio is hovering at a high of 77-78 per cent," it added.
Industry body Assocham had also said that economy requires funding at a cheap rate for further investment to boost the growth rate and to speed up the transmission effect because the inflation is well contained.
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.
(With agency inputs)