Anticipating correctly the softening of the headline retail inflation rate, the Reserve Bank of India had almost a week earlier cut the repo rate by 35 basis points from 5.74 per cent to 5.4 per cent. The repo rate is the policy rate at which the RBI lends money to the commercial banks to meet the latter’s liquidity shortfall. The 35-basis point reduction was announced on August 7 at the end of the RBI’s Monetary Policy Committee’s third bi-monthly monetary policy review of 2019-20. It also maintained its accommodative stance, indicating thereby that the central bank has taken the proposals of any rate increase in the near future off the table. And if optimists are to be believed, the maintenance of the accommodative stance also suggests that the central bank may remain open to further cuts in the repo rate, if necessary.
The RBI’s concerns over growth were obvious. Having achieved a reasonable degree of price stability, it was now turning towards the need for supporting growth. Prior to the August rate cut, the central bank had already announced a cumulative cut of 75 basis points in the repo rate since February 2019, although the transmission of that lower rate to the lending rates of commercial banks has been less than half. However, with the additional 35 basis points cut and provision of additional liquidity in the system, the outlook for greater transmission of the lower repo rate into the banks’ lending rates got better.
August 23, 2019