In the first bi-monthly monetary policy meet of the financial year, the Reserve Bank of India cut the key repo rate by 25 basis points to 6 percent, with retail inflation continuing to remain low and domestic economy showing muted growth prospects. The repo rate is back at 6 percent after a year.
The reverse repo rate has also been adjusted to 5.75 percent. The central bank maintained the stance to neutral.
Four out of six members were in favour of the 25 bps rate cut while five out of six members were in favour of keeping the maintaining the neutral stance.
Pami Dua, Ravindra Dholakia, Michael Debabrata Patra and RBI governor Shaktikanta Das were in favour of the cut while Chetan Ghate and Viral Acharya were not. For stance, only Dholakia voted to change the stance from neutral to accommodative.
The MSF or marginal standing facility and bank rate have also been adjusted to 6.25 percent, from the earlier 6.5 percent. MSF is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities.
The Reserve Bank of India projected the FY20 GDP growth to be 7.2 percent and for the first half of the new financial year, the GDP growth has been projected between 6.8 and 7.1 percent and for the second half of the fiscal, the GDP growth has been pegged between 7.3 and 7.4 percent.
For inflation, the retail inflation has been pegged at 2.4 percent by the central bank while for the first half of the new fiscal, the retail inflation has been pegged between 2.9 and 3 percent.
Das said that the short-term outlook for food and fuel prices is benign and a slowdown in the FY19 GDP growth is expected.
He added that there is a slowdown in the global economies as the inflation remains low despite the increase in crude oil prices.
All the respondents to CNBC-TV18's poll expected a 25 basis points rate cut from the monetary policy committee in its first bi-monthly policy. One basis point is a hundredth of a percentage point.
The repo rate is the rate at which the central bank of the country lends funds to the commercial banks. The commercial banks borrow funds only if they witness a shortfall in their funds. The monetary policy committee of a country uses the reverse repo rate as a tool to control the money supply in the country.
Experts, before the outcome of the meeting, said the latest inflation numbers formed the basis of the argument for a rate cut. The retail inflation in February 2019 jumped to a four-month high of 2.57 percent as against an 18-month low of 2.05 percent in January 2019.
"The rate cut was expected, the stance was expected and frankly the inflation forecast is not so much as a surprise because the first quarter of this year showed an undershoot two months ago and the inflation is tracking 30-40 basis points below the RBI’s old forecast and that level effect continues through the year," JP Morgan's Sajjid Chinoy said.
Das said that the reduction in the input price pressures among manufacturing firms is seen.
However, India continues to struggle with its factory output growth as it slowed to a six-month low in March as orders and output expanded at a weaker rate. But, the overall factory activity ran at a solid pace in the first quarter, according to PMI data.