RBI cuts repo rate by 25 bps to 5.75%; changes stance to accommodative

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Thursday reduced the repo rate by 25 basis points (bps) to 5.75 per cent in the second bi-monthly monetary policy meet of the financial year 2019-20 (FY20), that concluded today. It was a third straight interest rate cut by the RBI. The stance of the policy was changed to accommodative from neutral.

Repo rate is the rate at which the RBI lends money to the commercial banks, in case of any shortfall of funds. Consequently, reverse repo rate stands at 5.50 per cent. 

The RBI was widely expected to go for an interest rate cut amid dismal Gross Domestic Product (GDP) growth, subdued investment and slowdown in consumption space. Last week, government data showed GDP growth slowed to a five-year low of 5.8 per cent in the fourth quarter (Q4) of FY19.

According to a Bloomberg Survey, 31 of 43 economists had projected 25 basis point rate cut while three penciled in a 50 basis points cut.

Elara Capital, in its report dated June 1, had said weak growth amid benign CPI inflation is expected to create room for the Monetary Policy Committee to cut the repo rate by 50-75 bps through FY20E, beginning in June 2019.

Consumer Price Index (CPI) or retail inflation in April stood at 2.92 per cent, marginally higher than 2.86 per cent recorded in March, 2019.

The GDP growth projections for FY20 was cut to 7 per cent from 7.2 per cent, forecast in April meet.

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