RBI Policy Meet! Rates and GDP Forecast, Both Lowered.

In an expected announcement, the RBI today cut the Repo Rate further by 25 bps, a bit lower than the Street’s expectations. This was the fifth consecutive rate cut by the Central Bank in a bid to tackle the slowdown India currently faces.This takes the rate cut tally to a total of 135 bps, which now stands at 5.15%.

After a 3 day long Meeting of the Monetary Policy Committee (MPC), the GDP Forecast or the year was also lowered to 6.1% from 6.9% as quoted earlier. The GDP outlook for the year 2020-21 has also been lowered to 7.2%.

The lowered forecasts come as Eight of India’s core sectors face a prolonged slowdown. The Finance Ministry, in an effort to save the economy from this deep rooted slowdown has been releasing stimulus packages frequently now.

Other Announcements

The RBI Governor said that there is no reason to doubt the government’s commitment towards maintaining the fiscal deficit numbers given in the budget.

He also said that Central banks around the world are loosening monetary policy to tackle a global slowdown intensified by the US – China trade tensions.

He also announced that the RBI will revise the regulations for Co-Operative banks amid the recent PMC Bank Scandal which broke out. Although he said that one incident cannot and should not be used to generalise the health of the co-operative banking sector.

He also said that he was not aware of any demands of the government for an interim dividend of 30,000 Cr., as reports had stated recently.

The RBI has also decide to orchestrate a separate wing for NBFC’s viz. Non – Banking Financial Company – Micro Finance Lending (NBFC – MFI).

Important Questions

The cut in the real GDP growth projection for FY20 was one of the bigger talking points after today’s meeting. In that backdrop, today’s rate action came across some sort of a surprise to analysts — Why just a 25 bps cut in the benchmark rate when growth estimates have been cut this sharply?

“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 MPC said in its statement.

The new estimate follows a deep slump in GDP growth to a six-year low in the last quarter, primarily because of a massive consumption slowdown and a sharp fall in private investments.

Conclusion

The Street expects the Repo Rate to settle at 4.75% whereas Mr. Das said that he could not comment where the Repo Rate would be halted. The Rate cut of 25 bps was slightly disappointing as a 25 bps cut would neither boost private consumption or expenditure significantly.

The Government had recently announced a number of measures and bundled with the RBI’s constant rate cuts, the Government pins its hope of the Economy’s revival.

The stimulus packages introduced by the FM Nirmala Sitharaman, in a bid to boost expenditure, have had a positive impact, but no significant revival signs have come in yet. The core sectors including Automobile, Coal, and are still witnessing the effects of the slowdown, and the efforts for their revival are supported by both, the Government and the RBI as well.

Although the Rate cut was lower than expected, this is another step towards reviving the economy, by the Central Bank. More rate cuts should be expected in the future to boost Consumption and Investment in the Economy.