The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), in its third bi-monthly monetary policy review for fiscal 2020 on Tuesday, cut the repo rate by an unconventional 35 basis points (bps). That follows three cuts of 25 bps each since February this year. Consequently, the repo rate now stands at 5.40% and the reverse repo and marginal standing facility (MSF) rates at 5.15% and 5.65%, respectively. Four MPC members voted for a 35 bps cut and two for 25.
Today’s policy decision was based on the following factors:
i) Benign inflation scenario, especially core; ii) Sharp slowdown in domestic growth, amid global headwinds stemming from subdued global growth and escalating trade tensions
Inflation based on the consumer price index (CPI) remains well below the RBI’s medium term target of 4%, with the latest print, for June, at 3.18%. The MPC believes headline inflation will remain under 4% in the near term and has projected CPI inflation at 3.1% in Q2:2019-20 and 3.5-3.7% in H2:2019-20, with risks evenly balanced. Not only has core inflation (taking out food and fuel) moderated sharply, but also inflation expectations of the households for one year ahead horizon moderated by 20 bps, the committee has noted. CRISIL forecasts CPI inflation for fiscal 2020 at 3.8%, up from 3.4% in fiscal 2019 as food prices are consistently moving up.
GDP growth for fiscal 2019 was down from 7.2% to 6.8%, with fourth quarter growth as low as 5.8%. The latest print of 0.2% for core sector growth in June along with weakness in most high frequency indicators and slowing exports may suggest further slowdown in first quarter growth. The MPC has noted that “various high-frequency indicators suggest a weakening of both domestic and external demand conditions. The Business Expectations Index of the RBI’s industrial outlook survey shows muted expansion in demand conditions in Q2.” Accordingly, it revised down its real GDP growth forecast for fiscal 2020 by 10 bps to 6.9%. CRISIL, too, had revised down its real GDP growth forecast for fiscal 2020 last month to 6.9% from 7.1% earlier.