RBI cuts lending rate by 0.25%, projects GDP growth at 7.4%

RBI cuts lending rate by 0.25%, projects GDP growth at 7.4%

India's central bank cut interest rates on Thursday, giving a surprise boost to Prime Minister Narendra Modi ahead of general elections due this year. The gross domestic product (GDP) growth is likely to be influenced by growth in bank credit and overall financial flows to the commercial sectors, though slowing global demand could play a dampener, said an RBI document released after the three-day meeting of the central bank's Monetary Policy Committee (MPC).

Addressing the media in Mumbai today, Mr Das said that inflation had fallen to 18-month low of 2.19 per cent in December and was expected to remain in the range of 3.2 - 3.4 per cent in April - September which is lower than previous RBI prediction of 3.8 - 4.2 per cent range.

New governor Shaktikanta Das clearly meant business and went about the same in a pragmatic and calibrated manner, responding to changed economic environment, delivering the very much justified and much delayed rate cut with indications of more to come.

RBI Governor Shaktikanta Das cut the interest rate by 0.25 percent to 6.25 percent, a move that will lead to reduction of lending rate by banks leading to lower EMI for housing, auto loan and corporate borrowers.

"Continuing deflation in food items, a sharp fall in fuel inflation and some edging down of inflation excluding food and fuel contributed to the decline in headline inflation", the RBI said. One, there will likely be a series of rate cuts from this point and the cumulative impact will considerably put pressure on banks to pass on the benefit to the end-consumer. This too at a time when GDP growth forecast has been revised downward, both for FY19 to 7.2 percent from 7.4 percent earlier at that for FY20 to 7.4 percent.

Acharya also said the RBI does not act with a real rate of interest, which is the difference between the rate of inflation and the benchmark lending rate, in mind while setting its policies.

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With inflation largely under control, the big concern for the government is growth, particularly in an election year.

Further, as per MPC, investment activity is recovering but supported mainly by public spending on infrastructure and that output gap has opened up slightly. "The need is to strengthen private investment activity and buttress private consumption", it said.

It, however, warned about upward risks to inflation including the proposals in the Union budget that may be inflationary.

The committee though flagged external headwinds including trade tensions, and crude oil prices, which though appear well-behaved now.

While the decision to change the policy stance was unanimous, four out of six members voted for a rate cut while two opted for status quo.

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