RBI Cuts Rates by 25 Basis Points, Turns 'Accommodative' as Economy Slows

RBI Cuts Rates by 25 Basis Points, Turns 'Accommodative' as Economy Slows

Accordingly, a lower repo, or short-term lending rate for commercial banks, will reduce interest cost on automobile and home loans, thereby ushering in growth.

This is RBI's first monetary policy after Modi 2.0 took charge last week. The annual growth during the last fiscal at 6.8 per cent too was at a five year low.

Shaktikanta Das, the bank governor, said he wanted commercial banks to provide relief to buyers in housing, automotive and other sectors. It also expressed concern over a sharp slowdown in consumer demand and investment.

The announcement meant India had lost its place as the world's fastest-growing major economy to China, which is now on 6.4 percent growth. India's fiscal year runs from April to March.

In the April monetary policy, the growth of Gross Domestic Product (GDP) for 2019-20 was projected at 7.2 per cent - in the range of 6.8-7.1 per cent for the first half of the fiscal and 7.3-7.4 per cent for the second part - with risks evenly balanced. The six-member Monetary Policy Committee headed by RBI Governor Shaktikanta Das also unanimously made a decision to change the stance of monetary policy from neutral to accommodative. "The policy also has broad indications of more action on the liquidity front from the RBI in the coming days and confirms RBI's commitment to better transmission of the rate cut effects through liquidity", said Joseph Thomas, head of research at Emkay Wealth Management in an emailed note.

Markets reacted to the rate cut and change in stance as the 10-year benchmark bond yield fell to 6.89 percent from 7 percent before the policy announcement, while the rupee strengthened to 69.28 per dollar from 69.36 earlier.

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From December 2018 to February 2019, the Repor Rate was 6.5 percent.

The new Finance Minister Nirmala Sitharaman could propose tax cuts to boost demand when she presents her maiden budget following her switch from the defense ministry.

Two new cabinet committees were announced on Thursday to find ways to spur job creation and investment.

While the economy has regularly grown at about 7.0 percent since Modi came to power in 2014, it has failed to create enough jobs for the 1.2 million Indians who join the labor market each month.

The figures were leaked by a newspaper in January which called them the worst since 1972-73. Increased government borrowing and elevated small savings rate have rendered deposit/investment mobilisation by banks/NBFCs expensive, the India Ratings report.

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