Editor's Take | A small rate cut and a dovish statement

Editor's Take | A small rate cut and a dovish statement

"With current inflation remaining benign, we expect RBI to opt for a 40 bps rate cut at its policy review later this week in a bid to continue its support toward growth revival", said Yuvika Oberoi, an economist with Yes Bank in Mumbai.

Moneycontrol Deputy Executive Editor Ravi Krishna tells Shraddha Sharma why the market was disappointed with the rate cut and what's next in store.

As a result of the rate cut, the reverse repo rate under the liquidity adjustment facility (LAF) is now 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate will be 5.40 per cent, RBI Governor Shaktikanta Das said.

Government has noted the reduction in repo rate from 5.40 per cent to 5.15 per cent announced by the Monetary Policy Committee (MPC) and believes that this will complement the recent measures taken by the government to accelerate growth, an official statement released by the Finance Ministry said.

The economy expanded by just 5% in the June quarter, its slowest pace since 2013, on the back of low consumer demand and a slowdown in government spending amid global trade frictions. Last month, the RBI took the rare step of limiting withdrawals from PMC, causing depositors to besiege the bank's branches to retrieve their money.

With this downward revision, the monetary policy committee (MPC) has cut the growth forecast by 1.3 percentage points since February. It is likely that banks maybe forced to cut lending rates going forward.

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After the MPC meeting on October 4, 2019, the repo rate was cut for the fifth time, taking the cumulative cut to 135 bps in CY2019 so far.

It was widely speculated that the RBI might change its stance to "neutral" due to the fiscal pressure expected out of the Centre's recent growth inducing measures.

The government's fiscal space has been squeezed on account of cut in rates of corporate tax as well as lowering of GST rate on various goods.

"As soon as this issue came to the central bank's notice, the RBI has acted very swiftly".

"This further reduction of repo rate will not only bring down the lending rates but also incentivise investment and boost consumption", said Surendra Hiranandani, CMD, House of Hiranandani. The RBI retained its accommodative policy stance.

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