Sunday, August 25, 2019

RBI, again, cuts Repo Rate by 35 bases points to 5.4%

RBI had cut the repo rate by 75 basis points prior to this rate cut.

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Reserve Bank of India (RBI) has set-up a six-member monitory policy committee. On 7th August, the committee cut the short-term borrowing indicator Repo Rate by 35 bases points. Now the Repo Rate stands at 5.4%.

The committee was confused between the rate cut bases points, 25 was just fine, and 50 points would be excessive. So, a rate cut little above 25 points and much lower than 50 points is set.

Out of the six-member committee, four voted in favor of the 35 points rate cut. Hence, passing the cut by the majority.

Before this RBI had cut the Repo Rate by 75 bases points from 6.5% to 5.75%, divided into three 25 points cuts. Now the additional 35 points, make it a total of 110 points rate cut. In 2019, the repo rate has fallen from 6.5% to 5.4%, which is a significant fall in just six months.

During the press conference, the RBI governor also said that the expected growth rate is also cut down. The slowing down of the economy is due to the circular flow and not due to structural problems.

Views on RBI’s 35 bps Repo Rate Cut

The committee seems to have tried to tread a middle path by cutting rates but by an odd amount of 35 basis points instead of the usual 25 bps or 50 bps. Markets had already factored in 25 bps cut and so a 25 bps cut may not have enthused markets,” – Dheeraj Singh, Head of Investments at Taurus Asset Management.

“While we were hoping 50 bps rate cut, the RBI has chosen unconventional cut of 35 bps, which is mildly positive for the market. However, RBI cutting its estimation of GDP growth rate below 7 per cent, while widely expected, may not go down well with the market in short term,” said Rajiv Singh, CEO at Karvy Stock Broking.

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),” said Suvodeep Rakshit of Kotak Institutional Equities.

The success of this accommodative policy would depend entirely on the next level of its application, that is, the transmission of the lower rates to the ultimate borrowers. The banks seem to be seized of this need and effective cascading of the benefits of lower base rate may happen over the next few months,” said K Joseph Thomas, Head Research at Emkay Wealth Management.

In addition, “Global rates are cycling down on the Fed’s July 31 rate cut. Oil and commodity prices are also slipping on global uncertainty. The domestic inflation outlook remains benign: we track July inflation at 3 per cent well within the RBI’s 2-6 per cent mandate,” the BofA-ML said.

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