Breaking away from convention, the Reserve Bank of India (RBI) on Wednesday cut the repo rate by 35 basis points to 5.4 per cent to boost growth. The reverse repo rate has been adjusted at 5.15 per cent.
This will make home and auto loans even cheaper.
A lower repo, or short-term lending rate for commercial banks, will reduce the interest cost on automobile and home loans, thereby ushering in growth.
This is the fourth reduction in repo rate during 2019.
The RBI’s monetary policy committee (MPC) in its third policy review of the current fiscal also reduced the growth rate to 6.9 per cent from 7 per cent in FY2019-20.
“Various high frequency indicators suggest weakening of both domestic and external demand conditions,” the MPC said in a statement.
“The ‘Business Expectations Index of the Reserve Bank’s industrial outlook survey’ shows muted expansion in demand conditions in Q2, although a decline in input costs augurs well for growth.”
However, MPC said that the impact of monetary policy easing since February 2019 is also expected to support economic activity, going forward.
“Moreover, base effects will turn favourable in H2:2019-20. Taking into consideration the above factors, real GDP growth for 2019-20 is revised downwards from 7 per cent in the June policy to 6.9 per cent — in the range of 5.8-6.6 per cent for H1:2019-20 and 7.3-7.5 per cent for H2 – with risks somewhat tilted to the downside…,” the statement said.
Earlier in June, the apex bank had slashed the repo rate by 25 basis points to 5.75 per cent from a previous 6 per cent. The reverse repo rate was at 5.50 per cent.
Also, the GDP projection was in June, adjusted to 7 per cent from 7.2 per cent in an earlier projection.
The GDP growth for the first quarter of FY2020-21 is projected at 7.4 per cent.
The RBI, in April, had lowered its key lending rate by 25 basis points (bps) to 6 per cent. Before that, in February, the MPC had voted to lower the repo rate by 25 bps to 6.25 per cent.