Experts hope another 25 basis point rate cut by RBI

The central bank lowered the reverse repo rate at which it borrows money from commercial lenders to 5.15% from 5.50

The central bank lowered the reverse repo rate at which it borrows money from commercial lenders to 5.15% from 5.50

The six-member monetary policy committee (MPC), headed by RBI Governor Shaktikanta Das, chose to reduce key repo rate by 35 basis points to 5.45 per cent from 5.75 per cent on Wednesday with immediate effect. To a question on real interest rates and the level which the central bank is targeting, he said this is not the right time to look at that aspect as the RBI's main focus is to meet the output gap. Going forward, he said, banks should further lower their rates.

Four of the six members on the panel voted for a 35 bps rate cut and while two members voted to reduce the policy repo rate by 25 basis points. The stance remained unchanged in April policy, but in June, the committee changed stance to "accommodative" from "neutral" while revising the country's GDP growth rate to 7 percent from 7.2 percent.

The reverse repo rate now stands at 5.15%, with the central bank maintaining its accommodative stance, an indicator that more cuts may be in the offing.

"The 35 bps rate cut should be seen as a signal that the RBI MPC is quite concerned with the growth outlook beyond the usual 25 bps rate cut in a business-as-usual scenario (even though it does not reflect in the revised FY2020 GDP growth estimate)".

Speculations are rife about another rate cut with inflation well under RBI's comfort zone, slowing automobile sales, muted growth in infrastructure industries, concerns over spread of monsoon and slump in stock market.

This is RBI's second monetary policy after Modi 2.0 took charge in May.

"The monetary policy committee was of the view that a 25 basis point rate cut was inadequate due to evolving global economic conditions while a 50 basis point cut would be excessive", RBI Governor Shaktikanta Das told reporters. "Private consumption, the mainstay of aggregate demand, and investment activity remain sluggish".

CPI inflation is projected at 3.1 per cent for Q2 FY20 and 3.5-3.7 per cent for H2 FY20, said RBI.

The RBI would also allow bank lending to registered NBFCs (other than micro-finance institutions) for on-lending to agriculture (investment credit) up to Rs 10 lakh, micro and small enterprises up to Rs 20 lakh and housing up to Rs 20 lakh per borrower (up from Rs 10 lakh at present), and they would be classified as priority sector lending.

"Today's steps are marginally better from the ones taken earlier, but even these seem to be merely incremental in nature considering the current market", said the head of another small NBFC, who also asked not to be named.

The RBI will ensure that there is sufficient liquidity available for the economy.

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