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RBI Delivers 4th Straight Rate Cut, Lowers Growth Forecast: 10 Points

All six members of Governor Shaktikanta Das-led Monetary Policy Committee voted for a reduction in the repo rate.

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RBI Delivers 4th Straight Rate Cut, Lowers Growth Forecast: 10 Points

Wednesday's move makes the RBI the most aggressive central bank in Asia

The Reserve Bank of India on Wednesday announced its decision to cut the repo rate by 35 basis points, marking the fourth straight reduction in its scheduled bi-monthly reviews so far this year. All six members of Governor Shaktikanta Das-led Monetary Policy Committee voted for a reduction in the repo rate - the key interest rate at which the RBI lends short-term funds to commercial banks - and a status quo on the "accommodative" stance, which rules out any hikes for now. While most economists said the easing of monetary policy was along the expected lines, some even expected another rate cut in the next review slated for October.
Here are 10 things to know about this big story:
  1. After the reduction, the repo rate stands at 5.4 per cent, its lowest level recorded since 2010. The rate cut was in line with economists' expectations. Almost 80 per cent of 66 economists surveyed by news agency Reuters had expected the central bank to lower the repo rate by 25 bps.
  2. Wednesday's move makes the RBI the most aggressive central bank in Asia. Since February this year, the Reserve Bank of India has reduced the repo rate by a cumulative 110 basis points (1.1 percentage point).
  3. The rate cut comes a week after the Federal Reserve - the US central bank - reduced its key interest rates for the first time since 2008. The RBI mentioned a slowdown in global economic activity since the June meeting "amidst elevated trade tensions and geopolitical uncertainty".
  4. The last time the RBI made so many back-to-back cuts was after the global financial crisis over a decade ago, when most major central banks were desperate to revive economic growth.
  5. The Reserve Bank of India lowered its real GDP or gross domestic product projection for the current year to 6.9 per cent, from 7 per cent. The RBI expects GDP growth at 5.8-6.6 per cent in the first half of 2019-20, and 7.3-7.5 per cent in the second. It sees consumer inflation remaining inside its target range over a 12-month horizon.
  6. Economists say the reduction in its GDP projection signals the central bank's concerns on the growth front.
  7. "The RBI has done the maximum that a central bank can do in the current phase of economic slowdown," said Rupa Rege Nitsure, chief economist, L&T Financial Holdings.
  8. The central bank highlighted that liquidity in the system was in a large surplus in past two months, on the back of several factors including two OMO (open market operation) purchase auctions amounting to Rs 27,500 crore in June.
  9. Analysts say the RBI has moved to ensure sufficient liquidity in the system. "There seems to be a fervour to maintain comfortable liquidity in the banking system, which should be an additional support factor for bond yields, apart from cut in benchmark rates," said Lakshmi Iyer, chief investment officer (debt) and head products, Kotak Mahindra Asset Management Company.
  10. The stock markets plunged in late afternoon deals, with the S&P BSE Sensex index and the broader NSE Nifty benchmark closing with losses of 286.35 points - or 0.77 per cent - and 92.75 points - or 0.85 per cent - respectively.

(With agency inputs)





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