The Reserve Bank of India (RBI) today cut its repo rate, or the rate at which it lends to banks, by 25 basis points to 6%. This is the second consecutive rate cut from RBI under new chief Shaktikanta Das, after a surprise rate cut in February. 41 of 43 economists surveyed by Bloomberg had expected the RBI to cut repo rate by 25 bps, amid weakening economic growth and subdued inflation outlook.
However, banks may be able to pass on the RBI’s rate cut to borrowers only to a limited extent, say analysts. Earlier, banks had only reduced their lending rates by a token 5-10 basis points after the RBI’s last 25 bps cut in February. Deposit growth has come down sharply and every bank is competing with another to attract depositors, a top banker told Reuters.
The monetary policy committee of the RBI also decided to maintain the neutral monetary policy stance while voting 4-2 in favour of the rate cut.
The Sensex was flat in noon trade with analysts saying that a 25-bps cut was already factored in by the markets.
The RBI also lowered its GDP growth outlook for 2019-20. RBI expects GDP growth at 7.2% for 2019-20, lower than its February projection of 7.4%.
“There are some signs of domestic investment activity weakening as reflected in a slowdown in production and imports of capital goods. The moderation of growth in the global economy might impact India’s exports,” the RBI said.
The central bank also noted that higher financial flows to the commercial sector augur well for economic activity. Private consumption is also expected to get a fillip from public spending in rural areas and an increase in disposable incomes of households due to tax benefits, it added.
The RBI revised inflation outlook downwards to to 2.9-3% in the first half of this year and 3.5-3.8% for the second half but it warned of the upside risks to price pressures if food and fuel prices rise abruptly, or if fiscal deficits overshot targets.
The RBI also noted several uncertainties clouding its inflation outlook. “Early reports suggest some probability of El Nino effects in 2019. There is also the risk of an abrupt reversal in vegetable prices, especially during the summer months,” the RBI said.
The central bank also noted that crude oil prices have risen around 10% since the last policy.
Some analysts expect RBI to lower rates further during this year, if inflation stays benign. VK Vijayakumar, chief investment strategist at Geojit Financial Services, said: “A key takeaway from the policy is the projection of benign inflation for FY2020. Since the GDP growth rate for FY2020 has been lowered in this benign inflation scenario, one can expect more rate hikes probably two more this year. The stance has been maintained at neutral perhaps in the context of the rising crude price and concerns regarding a below normal monsoon.”
Private weather forecasting agency Skymet on Thursday said that it expects a below normal monsoon this year, citing developing El Nino phenomenon. Global oil prices are currently at a five-month high, near $70 a barrel.