- The monetary policy committee of the Reserve Bank of India (RBI) for the second consecutive time cut the benchmark lending rate by 25 basis points to 6%
- It cited concerns over growth as it lowered the GDP forecast to 7.2% for the current financial year from 7.4% projected in the February policy.
- The central bank said the output gap remained negative and the domestic economy was facing headwinds, especially on the global front.
- Output gap refers to the difference between the actual output of the economy and its maximum potential.
- The need is to strengthen domestic growth impulses by spurring private investment that has remained sluggish.
- The committee maintained the neutral policy stance, which means interest rates can move in either direction.
- With the inflation outlook remaining benign, the RBI will address the challenges to sustained growth of the economy while ensuring price stability on an enduring basis.
- The RBI lowered its inflation forecast to 2.9%-3% from 3.2%-3.4% for the first half of the current financial year and 3.5-3.8% in the second half, assuming a normal monsoon.
- Domestic GDP growth is also estimated to slow in 2018-19, with high frequency indicators suggesting slackening of urban and rural demand as well as investment activity.
- Bond traders, however, were not impressed with the 25 bps rate cut as they were expecting a higher quantum to address growth headwinds and deficit liquidity.
- The yield on the 10 year benchmark bond hardened from 7.27% to 7.35%.
- The State Bank of India, the country’s largest lender, said the marginal cost of fund-based lending rate (MCLR), which is the benchmark rate, can go down by 7-10 bps.
