RBI slashes growth estimate to 6.1%, brings down interest rate to decade low
In a clear admission about the poor health of the economy, the Reserve Bank of India (RBI) on Friday slashed its GDP growth estimate for the current fiscal to 6.1 per cent from 6.9 per cent and reduced the interest rate by quarter of a per cent even as the stock market benchmark BSE Sensex plummeted by 434 points due to heavy sell-off in banking and FMCG stocks.
The market was disappointed by such a massive downward revision of growth forecast and less than expected reduction in interest rate. Given the tame inflation rate and feeble growth, the street was expecting at least 40 basis point rate cut. The disappointed triggered a collapse in the market. It was the fifth straight rate cut that brought interest rate to almost a decade low.
With all six members of the Monetary Policy Committee (MPC) voting in favour of a rate cut and for retaining the accommodative stance, the benchmark repurchase rate was cut by 25 basis points to 5.15 per cent. The previous lowest repo rate of 5 per cent was recorded in March 2010.
Following the rate cut, the reverse repo rate was reduced to 4.9 per cent. While five members voted for a 25 bps cut, Ravindra Dholakia voted for a 0.40 per cent reduction.
The RBI revised downwards its estimate for GDP growth in the current fiscal to 6.1 per cent from 6.9 per cent it had previously estimated after lower-than-expected 5 per cent growth rate in April-June and no substantial uptick in the following quarter. Risks on the 6.1 per cent GDP growth estimate are “evenly balanced”, it said.
The repo rate cut is aimed at pushing consumption up during the ongoing festival season by reducing borrowing costs for home and auto loans, which are now directly linked to this benchmark.
RBI Governor Shaktikanta Das said as long as the growth momentum remains as it is now and growth revives, the MPC will continue with an accommodative stance while ensuring inflation remains within the target.” The RBI will continue accommodative stance as long as it is necessary and growth revives,” he said.
In the four previous rate cuts since February, the RBI had cut interest rates by 110 basis points whose transmission to borrowers in form of lower lending rate has “remained staggered and incomplete”, the Central bank said in a statement.
As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps. However, the WALR on outstanding rupee loans increased by 7 bps during the same period.
Central banks around the world are loosening monetary policy to offset a global slowdown, worsened by US-China trade tensions. The rate cut by the RBI follows a series of fiscal steps taken by the Government over the last six weeks to spur growth, including steepest ever cut in tax paid by companies, cost the exchequer Rs 1.45 lakh crore.
Asked if the corporate rate cut would impact fiscal deficit target of 3.3 per cent of the GDP, Das said the Government has stated that it will maintain fiscal deficit target and “we have no reason to doubt that”.
Admitting that the impact of the 135 bps rate cut will “take time” to filter in, Das said, “While the recent measures announced by the Government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum.”
The RBI raised its near-term inflation forecast slightly to 3.4 per cent for the second quarter of the fiscal started in April, while projecting it would stay below its medium-term target of 4 per cent.
On reviving growth, the MPC welcomed the recent moves by the Government as the ones in the right direction, but the resolution did not have any reference to the fiscal deficit or fiscal management, which is generally deemed to have an inflationary impact.
Meanwhile, after opening nearly 300 points higher, the Sensex gave up all the gains to turn negative shortly after the policy announcement by the RBI. The Sensex gyrated 770 points during the day to end 433.56 points or 1.14 per cent lower at 37,673.31. It hit an intra-day low of 37,633.36 and a high of 38,403.54. The broader NSE Nifty plunged 139.25 points or 1.23 per cent to close at 11,174.75. During the holiday-truncated week, Sensex plummeted 1,149.26 points or 2.96 per cent, while Nifty declined 337.65 points.
Top laggards included Kotak Bank, ICICI Bank, HDFC Bank, Tata Motors, L&T, SBI, Tata Steel and Axis Bank. On the other hand, TCS, Infosys, ONGC, Tech Mahindra, IndusInd Bank and NTPC rose up to 1.03 per cent. Rate-sensitive banking stocks faced the heat, finance, auto and realty indices tanking up to 2.45 per cent.
Saturday, 05 October 2019 | PNS | New Delhi
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