RBI cuts interest rates to spur economic growth
Shaktikanta Das at a press conference at the RBI headquarters in Mumbai on Wednesday.
Dubai - Unconventional 35bps cut is fourth straight lowering of rates in 2019
The Reserve Bank of India (RBI) on Wednesday announced an unconventional cut in its benchmark interest rates to spur economic growth in the wake of global slowdown.
The six-member monetary policy committee (MPC) of the RBI cut repo rates by 35 basis points to 5.40 per cent, the fourth straight reduction in benchmark rates this year. Four MPC members voted for the 35bps cut, while two voted for a 25bps cut, the RBI said. The reverse repo rate also reduced to 5.15 per cent.
The Indian central bank also announced a slightly downward revision in its economic growth forecast to 6.9 per cent from 7 per cent for fiscal year 2019-20 due to a slowdown in demand and investments, and said inflation will remain inside its target range over a 12-month horizon.
"With inflation projected to remain within target, addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture," governor Shaktikanta Das told a news conference.
Das defended the move of unconventional rate cut at the briefing, saying the MPC viewed a standard 25bps cut as being "inadequate in view of the evolving global and domestic macro-economic" conditions, while a 50bps cut was seen as potentially "excessive", given past RBI actions.
Economists and analysts said there is scope for more rate cuts as inflation is likely to remain muted. However, they said the real challenge remains getting India's banks to pass rate cuts to borrowers.
State Bank of India, the country's biggest lender by assets, cut its benchmark lending rate by 15bps across all tenors shortly after the policy announcement. Since the start of the year SBI has cut rates by just 30 bps in response to RBI's 110bps cuts.
"Unless the transmission is swift and full, we may not see a change in the consumption and investment trajectory," Sandip Somany, president of industry body FICCI, said.
The RBI's move came hours after the New Zealand central bank's decision to cut its rates by a steep 50bps, and just before the Bank of Thailand surprised the market by cutting its benchmark.
The bank statement said that economic activity remained weak in major emerging market economies - including China, India, Brazil and South Africa - pulled down mainly by slowing external demand.
Asia's third-largest economy grew at a significantly slower-than-expected 5.8 per cent annual pace in the January-March quarter. And most analysts expect data due later this month to show that growth in April-June faltered even further.
Ramesh Nair, chief executive and country head at JLL India, said the rate cut of 35bps delivered by the RBI is likely to bring in a balance between growth and inflation.
"In line with the general market sentiment, the cumulative 110bps rate cut in the last four policy reviews favours the Indian economy," he said.
He said the real estate sector will gain momentum owing to favourable policy reforms. However, the growth shall also depend on whether there is a proportional transmission of rate cuts to the end consumer.
"The rate cut has a direct bearing on the real estate sector considering that residential sales rely to a large extent on the availability of credit in the form of home loans and buyer sentiment," he said.
Anuj Puri, chairman of Anarock Property Consultants, said the hard facts of declining consumption and a deepening economic slowdown in India are inescapable, and real estate has been severely impacted by them.
"To this gloomy backdrop, the RBI's repo rate cut of 35bps to 5.4 per cent announced in the latest monetary policy is obviously welcome. This rate cut, the fourth consecutive cut since February 2019, is meant to boost consumer sentiments once commercial banks transmit the benefits to actual consumers," he said.
Surendra Hiranandani, chairman and managing director of House of Hiranandani, said it is imperative for banks to reduce the lending rates now to boost growth in real estate sector.
"We definitely welcome this move which will lift industry sentiments. The real estate sector has been looking forward to such initiatives to boost sales. It will support growth and ease the liquidity crunch in the economy," he said.
"We hope that the current rate cut would translate into lower EMIs and help soften home loan rates and also boost sales. It will help to ease the pressure off the market by attracting buyers to invest in the real estate sector," Hiranandani said.
"This rate cut along with various other reforms announced recently, is expected to cheer up developers as well as buyers in the real estate sector," he added.
Although the RBI decision was largely in line with expectations, Indian markets closed the day in the negative column.
The Sensex ended at 286.35 points, or 0.77 per cent, lower at 36,690.50 points, while the broader Nifty slipped by 92.75 points, or 0.85 per cent, to 10,855.50 points.
The Indian rupee depreciated by 2 paise to 70.84 (19.30 against the dirham) against the US dollar in intraday trading.