The Reserve Bank of India (RBI) cut key interest rate by 25 basis points (bps) on Thursday, its third reduction this year, seeking to lift the slowdown in economic growth and to boost consumer spending.

The move comes after the parliamentary elections saw Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) return to power with Prime Minister Narendra Modi at the helm for the second term.

RBI’s monetary policy committee (MPC) reduced the repo rate from 6% to 5.75%, lowest in nine years. Repo rate is the rate at which the apex bank lends short-term money to commercial banks. One basis point is one-hundredth of a percentage point. The central bank lowered the reverse repo rate, at which the banks keep money with the apex bank, to 5.50% from 5.75%. The MPC changed its policy stance to accommodative from neutral, meaning that it’s now in favour of lowering the interest rates.

Watch | RBI cuts repo rate by 25 basis points, policy stance now ‘accommodative’

RBI’s move signals that it is focused on supporting growth with the objective of achieving medium-term inflation target. The rate cut comes at a time when the Indian economy is seeing growth slowdown. For the fourth quarter FY19, gross domestic product (GDP) growth plunged to a five-year low to 5.8%. The annual growth in the economy has slowed down to a 5-year low of 6.8% in FY19.

RBI said the impact of recent policy rate cuts and expectations of a normal monsoon in 2019, the path of CPI inflation is revised to 3.0-3.1% for H1:2019-20 and to 3.4-3.7% for H2:2019-20, with risks broadly balanced. The RBI has revised GDP growth from 7.2% to 7% for the current financial year.

With the current rate cut, RBI so far has reduced 75 bps this year. Hence, expectations are high that banks will pass on the rate cut by lowering their lending rates and in turn possibly lowering the equated monthly instalments (EMI) that individuals pay on home and consumer loans.

However, the transmission of rate cut has been slow. According to Care Rating, though the MPC reduced policy rates by 50 bps in February and April, the median MCLR has declined from 8.8% in January to 8.74% in April which implies transmission of only 6 bps in the subsequent three months following the first repo rate cut. However, the RBI said in its policy statement that the transmission of the cumulative reduction of 50 bps in the policy repo rate in February and April 2019 was 21 bps to the weighted average lending rate (WALR) on fresh rupee loans.

All members of the MPC unanimously decided to reduce the policy repo rate by 25 basis and change the stance of monetary policy from neutral to accommodative.

First Published: Jun 06, 2019 11:50 IST