The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), in its fourth bi-monthly monetary policy review for fiscal 2020 today, cut the repo rate by 25 basis points (bps), in line with expectations. Consequently, the repo rate now stands at 5.15%, and the reverse repo and marginal standing facility rates, at 4.90% and 5.40%, respectively. The decision to cut the rate was unanimous. One of the six members, in fact, plumped for a 40 bps rate cut. The MPC also decided to continue with the accommodative stance.
The decision to cut the policy rate was guided by the following factors:
Inflation based on the consumer price index (CPI) remains contained, with the latest print for August at 3.21%. The MPC retained its inflation forecast at 3.5-3.7% for the second half of fiscal 2020 and 3.6% for the first quarter of fiscal 2021. It, however, noted that three-month and one-year ahead inflation expectations of households polled by the RBI had risen in the current round, reflecting near-term price pressures. Even though the MPC suggested mild upward risk to inflation outlook on account of volatile oil prices, it was hopeful that food (especially vegetables) inflation would start moderating from winter season, and core would remain subdued. Overall, inflation is expected to remain below the target of 4.0% in the near term. CRISIL forecasts CPI inflation for fiscal 2020 at 3.6%, marginally higher than 3.4% in fiscal 2019, on account of higher food prices.
Gross domestic product (GDP) growth has slowed down sharply. At 5.0%, real GDP growth in Q1 fiscal 2020 was at its lowest in 25 quarters. High-frequency indicators continue to point to subdued domestic demand. The latest print of -0.5% core sector growth for August, along with weakness in most high-frequency indicators and slowing exports, suggest the economic slowdown persists. According to the MPC, “The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q3.” Accordingly, it revised down its real GDP growth forecast for fiscal 2020 by 80 bps to 6.1%. CRISIL, too, had recently revised down its real GDP growth forecast for fiscal 2020 to 6.3% from 6.9% earlier. Slowdown in growth has opened up the output gap and created space for further rate cuts.