Mumbai: The Reserve Bank of India on Friday cut interest rates for the fifth time this year to kickstart the languishing economy as it slashed the GDP growth projection for financial year 2019-20 to 6.1 per cent from the earlier forecast of 6.9 per cent.
The RBI Monetary Policy Committee, led by Governor Shaktikanta Das, maintained its “accommodative” stance and said it would maintain this position “as long as it is necessary” to revive growth, while ensuring inflation remains within target.
The six-member monetary policy committee (MPC) cut the repo rate by 25 basis points to 5.15%, in line with expectations. The reverse repo rate was reduced to 4.9%.
In five bi-monthly reviews this calendar year, the MPC has reduced the repo rate — the key rate at which the RBI lends short-term funds to commercial banks – by 1.35 percentage point amounting to 135 basis points in aggregate.
At its last meeting, the MPC reduced the benchmark lending rate by an unusual 35 basis points to 5.40 per cent.
Shaktikanta Das had already hinted that benign inflation provides room for further monetary policy easing while space for fiscal space is limited.
The government has announced a series of measures including steepest cut in corporate tax, rollback of enhanced surcharge on Foreign Portfolio Investors, among others to jump-start growth, which hit a six-year low of 5 per cent during the first quarter of the current fiscal.
The MPC in its August meeting had already trimmed the GDP growth forecast to 6.9 per cent from 7 per cent with a downward bias.
Recently, Das had said he was “surprised” by the 5 per cent growth in GDP in the first quarter, which looked worse than expected. “We had projected 5.8 per cent and I think almost everybody had projected not below 5.5 or so. But the number of 5 per cent is a surprise,’’ he said.
Ahead of the meeting, the Das-headed Financial Stability and Development Council (FSDC) sub-committee took stock of the prevailing macroeconomic situation. Earlier, the RBI Governor had said that the government has little fiscal space, giving hope that the central bank may provide more monetary stimulus to prop up the economy.
The government’s fiscal space has been squeezed on account of cut in rates of corporate tax as well as lowering of GST rate on various goods. Revenue collection too has been below the Budget estimates.
Experts had expected the rate cut as the government’s hands are tied and the onus of taking initiatives now rests with the central bank.
While economic activities are showing signs of sluggishness, the policy makers have drawn solace from the fact that retail inflation remains in the comfort zone of the central bank. Retail inflation inched up to 3.21 per cent in August but remained within the RBI’s comfort zone.
The RBI has been mandated by the government to ensure that inflation remains below 4 per cent, with deviation of 2 per cent on either side.
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Source: News18