RBI cuts key rate to 9-year low to boost growth

The Reserve Bank of India (RBI) today cut key interest rate by 25 basis points (bps), its third reduction this year, seeking to lift the slowdown in economic growth and to boost consumer spending. The move comes after the parliamentary elections saw BJP-led NDA return to power with Prime Minister Narendra Modi at the helm for the second term.

RBI’s monetary policy committee (MPC) reduced the repo rate from 6% to 5.75%, lowest in nine years. Repo rate is the rate at which the apex bank lends short-term money to commercial banks. One basis point is one-hundredth of a percentage point.

The central bank lowered the reverse repo rate, at which the banks keep money with the apex bank, to 5.50% from 5.75%. The MPC changed its policy stance to accommodative from neutral, meaning that it’s now in favour of lowering the interest rates.

RBI’s move signals that it is focused on supporting growth with the objective of achieving medium-term inflation target. The rate cut comes at a time when the Indian economy is seeing growth slowdown. For the fourth quarter FY19, gross domestic product (GDP) growth plunged to a five-year low to 5.8%. The annual growth in the economy has slowed down to a 5-year low of 6.8% in FY19.

RBI said the impact of recent policy rate cuts and expectations of a normal monsoon in 2019, the path of CPI inflation is revised to 3.0-3.1% for H1:2019-20 and to 3.4-3.7% for H2:2019-20, with risks broadly balanced. The RBI has revised GDP growth from 7.2% to 7% for the current financial year.

 

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