Monday, 22 July, 2019

Economists call for at least 25 bps rate cut by RBI

RBI monetary policy review repo rate cut explained Reserve bank of India Governor Shaktikanta Das during a press conference
Ginger Lawrence | 06 April, 2019, 15:26

Four members of the monetary policy committee (MPC) voted in favour of the rate cut, while Deputy Governor Viral Acharya and Chetan Ghate voted for maintaining the status quo.

A panel of economists, including former Chief Economic Adviser Arvind Virmani, Tuesday called for at least 0.25 percentage point rate cut in the RBI's first monetary policy of the current fiscal to be unveiled later this week.

Accordingly, the reverse repo rate under the Liquidity Adjustment Facility (LAF) stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.25 per cent.

RBI Rate Cut: What Does This Mean?

On the outlook, RBI projected CPI inflation at 2.8 per cent for Q4 of 2018-19, 3.2-3.4 per cent for H1:2019-20 and 3.9 per cent for Q3:2019-20, with risks broadly balanced around the central trajectory.

Muted growth and subdued inflation prompted the Reserve Bank of India (RBI) on Thursday to lower its key lending rate for commercial banks by 25 basis points (bps) to 6 per cent. Apart from United States trade issues, the uncertainties in the European market due to lingering Brexit decision has contracted the industrial production during September-January.

"The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish", the RBI wrote in the policy statement.

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"The onus is now on the banks to concurrently reduce home loan rates further, thereby encouraging more fence-sitters to take purchase decisions and giving another boost to the real estate sector", said Puri.

Since then, there are some signs of domestic investment activity weakening as reflected in a slowdown in production and imports of capital goods, it said after the three-day meeting of the Monetary Policy Committee (MPC).

The monsoon outlook with the probability of El Niño, uncertain outlook for crude prices that have been rising and the fiscal situation were among the factors flagged by the RBI.

Annual consumer inflation was just 2.57% in February following five months of deflation in food prices.

Virmani said that it is for the RBI to understand that the real interest rate in India right now is very high.

Repo rate is the interest charged by RBI from commercial banks while lending them short term money, and reverse repo is the rate at which RBI borrows money from the commercial banks.

China, which is one of the India's largest trading partner, recently lowered its economic growth target amid slowing global economy and a effects of trade war with the US.