The six-member Monetary Policy Committee of the Reserve Bank of India (RBI) cut interest rates for the fifth time in a row in its fourth bimonthly policy review. The MCP said it will maintain an accommodative policy stance until growth revives. RBI lowered its repo rate by 25 basis points to 5.15% for new borrowers. With this cut, the policy rates have come off by as much as 135 points so far this year to a nine-year low.
RBI governor Shaktikanta Das said, ‘’The central bank will “continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.’’
RBI also reduced its growth forecast for 2019-2020 to 6.1% from 6.9%, with the committee noting that the negative output gap has widened further. RBI also raised the lending cap for microfinance institutions to Rs 1.25 lakh from Rs 1 lakh in order to allow a wider range of recipients to be covered by this mode of financial inclusion. According to HDFC CEO Keki Mistry, lending rates to repo can be volatile. “In the short term, rates may go down by another quarter percentage but as economic activity picks up, the repo rate will rise. Those who are not used to this volatility could have a problem,” he said.
RBI has maintained its consumer price inflation forecast of the fiscal year 2019-20 for the second half at 3.5%-3.7%. “We feel RBI may cut rates in the coming months by another 50 basis points as both domestic and international growth is weak and inflation expectations globally continues to be lower,” said Murthy Nagarajan, head, fixed income, Tata Mutual Fund.