RBI cuts interest rate by 25 basis points and lowers GDP forecast to 6.1%

• As expected, RBI cut repo rate by 25 basis points or 0.25%
  
• It also kept its stance as accommodative.
  
• BSE Sensex rose 200 points in the morning anticipation of a sharp rate cut.

Indian central bank today cut the repo rate by 25 basis points, and retained its accommodative stance. This is the fifth consecutive rate cut, brings interest rate to 5.15% at which the Reserve Bank of India (RBI) to banks.

The RBI has cumulatively cut interest rates by 1.35% as of now, in multiple cuts. In the last monetary policy, it went ahead with a 35 basis point rate cut, which was unprecedented.

RBI also reduced its growth rate projections for the current financial year to 6.1% from 6.9% earlier.

The stock markets have been predicting a 25 basis point or higher rate cut and BSE Sensex rose 200 points in the morning in anticipation.

“We pencil in a 40 bps of rate cut which should be a signal to the market that the Monetary Policy Committee is not quite done as it front loads the remaining couple of rate cuts in the cycle,” said Suvodeep Rakshit, Vice President & Sr. Economist, Kotak Institutional Equities.

RBI has been saying that growth will be a primary concern. In the first quarter of the financial year, the economy grew at 5% instead of the estimated 5.8-6.6% the first half. “With inflation remaining within its comfort range, despite recent onion price increases, revisions to its growth forecast warrant a sharper-than-usual rate cut in the October policy,” said Rakshit.

Experts also believe that a chunky rate cut would speed up the slow transmission of rate cut benefits by banks to consumers. “The monetary policy expectation is not just limited to rate cuts. While aggregate liquidity conditions have improved, transmission remains slow. The RBI’s assessment of the same will be critical,” said a report by Edelweiss Research.