On Thursday in the first bi-monthly monetary policy meet of this financial year 2019-2020, RBI reduced the repo rate by 25 bps to 6%. It has been that initial back-to-back rate reduction conducted by the central bank since the formation of the (MPC) Monetary Policy Committee in the late year of 2016.
The last policy meet that was held in the month of February was the first one under Governor Shaktikanta Das. In that policy meet, the central bank reduced the repo rate by 25 bps or from 0.25 %-6.25%. Policy stance was also changed from calibrated tightening to neutral and was acquired during the last year’s meet in the October policy.
Repo rate is basically that rate which is used by RBI to lend money to all commercial banks if there occurs any deficit of funds. A rate reduction just one week before the start of the Lok Sabha elections is decisive for the ruling NDA party.
Most of the economists along with market experts predicted a rate reduction in growth among benign inflation and flagging. It was predicted at home and abroad. Inflation was always there below the 4 % target set by RBI for continuous 7 months. But key inflation that does not include food as well as fuel is seen to run near to 5.5%.
Moreover banks are unwilling to lower rates. This is because deposits along with household financial savings are now at historical lows. Only 8 of the banks have reduced repo rates by 5-10 bps till now. Any more rate reduction will be directed by the fiscal policies of the latest government, monsoon as well as successive reworking in the forecast of inflation. The clarity on all these will be emerging most probably over the next few quarters.
Financial year 2020’s GDP growth has been projected at 7.2 %. Q4FY19 CPI inflation is observed at 2.4%. CPI inflation thus has been reviewed downwards to 2.4% in Q4 of the year 2018-2019. In the first half of the year 2019-20 it is 2.9-3% and in the second half of the year 2019-2020 it is 3.5-3.8%