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Aug 20

RBI Repo Rate Cut by 35 bps to 5.40% Still Maintaining Higher Lending Rate

RBI Monetary Policy Committee has announced an unconventional deduction of 35 basis points in the third bi-monthly policy review. The inflation rate has persistently been below the RBI limit of 4 percent and hence the deduction in the rate came is in line with the market expectations.

RBI had reduced the policy rate by 75 basis points, in the earlier policy reviews and now with this cut tally stands at 110 basis points.

The cut in the repo rate highlights the accommodative stance of the central bank as “the MPC believes that 25 points cut might have been meek and 50 points cut a bit excessive”, says RBI Governor.

The world is facing economic slowdown impacting the global economy. There are several factors and reasons behind it. The need is to implement the required improvement measures. Every country is trying its best to fight against it and contribute towards strengthening the global economy as a whole.

    Dheeraj Singh, Head of Investments at Taurus Asset Management, believes that the committee has opted for a middle path with 35 basis points deduction; as 25 basis points cut might not have encouraged the market. RBI Governor Das has emphasised on the ‘accommodative stance’ of the central bank on the policy review. Das highlights that the economic slowdown is temporary and cyclic; not deep and structural. The policy review aims to provide the required push and incentive for economic growth acceleration.

    The revision in the rates has sent positive precursory signals to the market to brace for the upcoming festive season beginning in September. Experts believe that the Central Bank would not be that aggressive with the policy revisions, as keeping the inflation rates well within the limits is also imperative.

    The RBI estimates the GDP growth rate to remain balanced at 6.9 per cent for FY20. The CPI inflation rates are estimated to be between 3.5-3.7 per cent. The Governor also explained the reason behind the MPC (RBI Monetary Policy Committee) going for an unprecedented 35 bps rate cut.

    Rajiv Singh, CEO at Karvy Stock Broking believes that the market hoped for a 50bps rate cut but RBI chose a mild option with 35 bps cut, keeping the hopes still alive for market. Soon after the announcement, a volatile response was observed in the Sensex as it gained 120 points and closed 160 points down just in half an hour.

    K Joseph Thomas, Head Research at Emkay Wealth Management, speculate that the trickling down benefits of the policy review will be felt in next few months. The success of the policy review depends on timely and appropriate implementation of the revised rates and its ultimate benefits to the borrowers.

    The global sluggishness and the slowed growth rates are affecting the oil and commodity prices. The domestic inflation rates are estimated to remain under control; in the bracket of 2-6 per cent. The economy is experiencing sluggish growth in most of the sectors.

    The US-China trade war escalation has also contributed in the increase of risks.  Experts believe that the slowdown may remain for the next few quarters.

    The growth of eight core industries is at four years low and weak investments have raised the concerns. The sales in the automobile sector are decreasing and exports have been impacted amidst the global economic stagnation.

    Experts believe that India’s lending rates still float higher than most of the countries. Tackling the economic slowdown needs flexible and cheap lending supported by the policy measures. The policy revision by RBI helps maintain a close check on the domestic and international market.

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