The Reserve Bank of India (RBI) on Wednesday reduced its repo rate (short-term lending) by 35 basis points (bps) to 5.40% in its third bi-monthly monetary policy review for 2019-20.
Following the move, the reverse repo rate (short-term borrowing) stands at 5.15%. Subsequently, the marginal standing facility (MSF) and the Bank Rate have also come down to 5.65%.
In a statement, RBI says, "The monetary policy committee (MPC) notes that inflation is currently projected to remain within the target over a 12-month ahead horizon. Since the last policy, domestic economic activity continues to be weak, with the global slowdown and escalating trade tensions posing downside risks. Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish. Even as 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. Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate."
RBI says, all members of the MPC unanimously voted to reduce the policy repo rate and to maintain the accommodative stance of monetary policy. Four members Dr Ravindra H Dholakia, Dr Michael Debabrata Patra, Bibhu Prasad Kanungo and Shaktikanta Das (RBI governnor) voted to reduce the policy repo rate by 35 basis points, while two members Dr Chetan Ghate and Dr Pami Dua voted to reduce the policy repo rate by 25 bps.
Speaking with reporters, governor Das said the RBI's MPC found 35bps sufficient for the time period, as 25bps would have been 'inadequate' and 50bps would have been "excessive".
He had dropped a hint on this possible move in a speech earlier in the year.
"A thought comes to my mind that if the unit of 25 basis points is not sacrosanct and just a convention, monetary policy can be well served by calibrating the size of the policy rate to the dynamics of the situation."
"...and the size of the change itself can convey the stance of policy. For instance, if easing of monetary policy is required but the central bank prefers to be cautious in its accommodation, a 10bps reduction in the policy rate would perhaps communicate the intent of authorities more clearly than two separate moves—one on the policy rate, wasting 15bps of valuable rate action to rounding off, and the other on the stance, which in a sense, binds future policy action to a pre-committed direction," he added.
Talking about the liquidity crisis, the RBI governor says the situation in the country is easing and that the banking system currently has abundace of liquid money. The statement gains significance as the economy is going through a slowdown, with a major reason being lack of liquidity and the eventual lower demand.
According to the central bank, industrial growth in India, measured by the index of industrial production (IIP), moderated in May 2019, pulled down by manufacturing and mining even as electricity generation picked up on strong demand. In terms of the use-based classification, the production of capital goods and consumer durables decelerated. However, consumer non-durables accelerated for the third consecutive month in May. The growth in the index of eight core industries decelerated in June, dragged down by a contraction in petroleum refinery products, crude oil, natural gas and cement.
"High frequency indicators of services sector activity for May-June present a mixed picture. Tractor and motorcycle sales—indicators of rural demand – continued to contract," RBI says adding "Amongst indicators of urban demand, passenger vehicle sales contracted for the eighth consecutive month in June; however, domestic air passenger traffic growth turned positive in June after three consecutive months of contraction. Commercial vehicle sales slowed down even after adjusting for base effects. Construction activity indicators slackened, with contraction in cement production and slower growth in finished steel consumption in June. Import of capital goods – a key indicator of investment activity—contracted in June."