The Reserve Bank of India (RBI) on Wednesday cut the repo rate for the fourth time in a row by an unconventional 35 basis point to give a fillip to the sagging economy. The RBI reduced the growth forecast for the year to 6.9 per cent from 7.2 per cent.
The quantum of cut was more than the expectation and yet the stock market maintained its slide as foreign investors continued to flee the country.
This is the first time the RBI has cut the rate by 35 basis points. In the past, it always reduced the rate in the ratio of 25 bps.
The RBI had few options but to cut the interest rate. The state of economy is alarming in view of worrisome macro-indicators. Auto sales hit a 20-year low in July and IIP growth touched a 57-month low in June. The dismal state of export and bloodbath in the markets and falling consumption s are factors that the Central bank could not have ignored.
And yet, Sensex lost nearly 400 points from peak of the day, closing 286 points from where it opened. The bank nifty also followed the same trend, falling around 650 points from the top to close at 2,700. The bear grip that has tormented the market since the Budget day has seen Sensex and bank nifty losing around 4000 points each. At 11,855 points, Nifty is trading one year low.
Any hope that the a positive RBI announcement on rate cut could give the bear some handle to push the market up soon vanished as the indices slipped into red zone soon after the statement. The fall gained momentum, and by close the market registered yet another “bloody” day.
The street was spooked by the falling rupee and the cut in the growth forecast by the RBI. Similarly, the rupee lost another 15 paisa to close at 70.88 to the dollar. Das said the RBI has lowered its GDP growth projection by 10 bps to 6.9 per cent for FY20, with more downside risks.
“Our understanding is that at this point it is a cyclical slowdown and not really a deep structural one. Nonetheless, we have to recognise there is room,” he said.
This six-member RBI rate-setting monetary policy committee maintained the accommodative stance while going in a for an unconventional 35 basis points reduction in the repo rate to 5.4 per cent in a unanimous vote, which Governor Shaktikanta Das described as a balanced act, neither inadequate nor excessive.
The RBI has reduced the repo rate by 110 bps since February.
“The MPC judged that with inflation projected to remain within the target, addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture,” Das told reporters after announcing the third bi-month monetary policy meeting of the year.
Das expressed confidence that the Government will come up with more measures to revive the sagging growth, which dipped to a five-year low of 5.8 per cent for the March quarter and is widely expected to slip further in the June quarter.
The statement comes amid a slew of industry leaders, including engineering giant L&T chairman AM Naik and Godrej Group chairman Adi Godrej, have expressed disappointment on the economy and called for more measures to revive growth with faster decision making and ensuring communal harmony.
Of the six MPC members, four --- Shaktikanta Das, Michael Patra (who is known for his hawkish stance), Bibhu Kanungo and Ravindra Dholakia --- voted for the steeper 35 bps cut, while the other two --- Chetan Ghate and Pami Dua --- voted to reduce the policy repo rate by 25 bps.
The rural demand in the form of two-wheeler and tractors sales and urban demand in the form of sales of passenger cars have slowed down, which is counter-cyclical, the Governor said. The RBI said its CPI inflation is projected remain at 3.1 per cent for Q2 and 3.5-3.7 per cent for the second half.
Defending the steeper cut and an admission of the deepening slowdown, the Governor said, “These policy impulses have been transmitted through financial markets fully. The weighted average call money rates has declined by 78 bps, market repo rate by 73 bps and the 10-year benchmark G-secs yield by 102 bps. Banks, on the other hand, have reduced their interest rates on fresh rupee loans by only 29 bps so far. But he sounded confident of higher transmission in the weeks and months ahead.
Das said the RBI’s policy rate cuts along with the measures taken by the Government will ensure a situation where the system is surplus with liquidity.
“I think credit flow will now revive and the measures that we have taken today will augment the credit flow into the system. Therefore, growth numbers will pickup,” he said.
Speaking on crisis in the parallel banking sector, Das said the RBI has identified 50 large NBFCs, including some housing finance companies, and is monitoring them.
“It is our endeavour to ensure that there is no collapse of any large systematically NBFCs. We are monitoring the situation and we will see how it moves forward,” he added.