In a move that may lead to the positive impact in the consumer market, push in the investments and especially lowering the EMIs, the Reserve Bank India (RBI) on Tuesday cut the key interest rate by 0.25 %. This is third time the rates have been slashed this year.
The decision to cut the rates is expected to meet market and government expectations of boosting growth by lowering borrowing cost. However, the RBI has left all other policy tools like Cash Reserve Ratio (CRR) unchanged at 4% and Statutory Liquidity Ratio (SLR) at 21.5%.
Announcing the second bi-monthly monetary policy this fiscal, RBI Governor Raghuram Rajan said, “with low domestic capacity utilisation, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today”.
The RBI had previously cut repo rate by 0.25 per cent each in months of January and March. But that did not make the industry to pick up its performance.
“Investment is still very tepid. Corporate results have been quite weak suggesting that economy is still below potential,” Dr. Rajan added.
With the lowering of repo rate to 6.25%, the bank rate has come down to 8.25% from 8.5%. As the inflation is expected to rise to 6% by January 2016, the RBI has emphasised that the strong food policy management is important to keep inflation and inflationary expectations under check in near term.
Both the government and the industry were seeking a rate cut for some time now as the stock markets have performed below par even after two earlier rate cuts. In the last 10 sessions, the Sensex has risen by only 161 points or 0.58% in spite of the strong GDP performance in Q4 and inflation remaining within the comfort zone of the RBI.
“Global crude prices are a risk to inflation. Also, the volatility in external environment can affect inflation. The GDP growth target for the financial year 2016 has been cut to 7.6% from 7.8%,” told Dr. Raghuram Rajan.
The RBI governor also pointed to the monsoon cycle, whose inconsistency may cause worry as it is sure to impact the inflation.
“If monsoon is better than forecast, there may be more room for rate cuts. If government contains inflationary impact, there may be room for more rate cuts. Biggest uncertainty for inflation is outcome of the monsoon,” he told the conference.