RBI cuts key rate by 25 bps to boost economic activitiy

RBI monetary policy review repo rate cut explained

"On the basis of an assessment of the current and evolving macroeconomic situation, the MPC made a decision to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6 per cent from 6.25 per cent with immediate effect", the RBI said.

"It has been chose to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates", RBI Governor Shaktikanta Das said after announcing the second 25 basis points repo rate cut in the current calendar year.

The reverse repo rate has also been slashed by 25 basis points, and now is 5.75%, down from 6%. However, the central bank retained its stance for the monetary policy at "neutral".

It also said that headline CPI inflation is expected to move up from its recent lows as the favourable base effects dissipate but is expected to remain below the target of 4 per cent.

This is the second consecutive rate cut from RBI under new chief Shaktikanta Das, after a surprise rate cut in February.

India's financial markets were little changed after the policy decision.

"The MPC notes that the output gap remains negative and the domestic economy is facing headwinds, especially on the global front". "The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish".

The lower short-term lending rate for commercial banks will reduce interest costs on automobile and home loans, thereby giving a push to demand.

The Reserve Bank Wednesday cut the retail inflation forecast to 2.9-3 percent for the first half of current fiscal, mainly due to lower food and fuel prices as well as expectation of a normal rainy season. The MPC headed by RBI Governor Shaktikanta Das will announce the resolution of the meeting at around noon on Thursday.

"No substantial relief is expected for borrowers in their monthly loan installments as banks are unlikely to induce a large cut in their benchmark lending rates" Gupta said.

With that in mind, more than 85 percent of the almost 70 economists polled by Reuters expected the RBI to cut its benchmark lending rate, the repo rate, by 25 basis points to 6.00 percent on 4 April.

Earlier, the second advance estimates for 2018-19 released by the Central Statistics Office (CSO) in February 2019 revised India's real gross domestic product (GDP) growth downwards to 7 per cent, from 7.2 per cent projected in the first advance estimates.

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