The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Wednesday cut repo rate by 35 basis points (bps) in its third bi-monthly policy review of the financial year. It was fourth rate cut by the central bank in a row. The short-term lending rate now stands at 5.40 per cent.
The MPC felt standard 25 bps rate cut might have been and 50 bps rate cut a bit excessive, RBI Governor Shaktikanta Das told reporters.
Four out of six committee members voted in favour of the 35 bps rate cut.
Persistent weakening of core inflation has kept the headline rate below the central bank’s 4 per cent target for the 11th straight month in June and, thus, the rate cut was largely in line with Street expectations.
RBI had cut the policy rate by 75 basis points prior to this, through three rate cuts of 25 bps each in February, April and June. Wednesday’s rate cut increased the tally to 110 basis points.
“The committee seems to have tried to tread a middle path by cutting rates but by an odd amount of 35 basis points instead of the usual 25 bps or 50 bps. Markets had already factored in 25 bps cut and so a 25 bps cut may not have enthused markets,”Dheeraj Singh, Head of Investments at Taurus Asset Management.
The rate cut has sent a strong signal to domestic banks to cut lending rates before the busy festive season kicks off in September.
Heading into the event, analysts had suggested the need for a 50 basis points rate cut, but said Governor Das’ July interview where he had talked about a 25 bps equivalent of easing due to RBI’s accommodative stance suggested the central bank would not be as aggressive.
The RBI has cut GDP estimate to 6.9 per cent, adding that the risks to FY20 GDP forecasts have ‘somewhat tilted to the downside.’ Inflation (CPI) risk remained evenly balanced, the RBI said, anticipating October-March CPI inflation at 3.5-3.7 per cent.
“While we were hoping 50 bps rate cut, the RBI has chosen unconventional cut of 35 bps, which is mildly positive for the market. However, RBI cutting its estimation of GDP growth rate below 7 per cent, while widely expected, may not go down well with the market in short term,” said Rajiv Singh, CEO at Karvy Stock Broking.
Sensex jumped over 120 points in a knee-jerk reaction to the policy announcement, but failed to hold the gain and tanked to trade 160 points down within minutes.
“The 35 bps rate cut should be seen as a signal that the RBI MPC is quite concerned with the growth outlook beyond the usual 25 bps rate cut in a business-as-usual scenario (even though it does not reflect in the revised FY2020 GDP growth estimate), said Suvodeep Rakshit of Kotak Institutional Equities.