Muted growth and subdued inflation prompted the RBI on Thursday to lower its key lending rate for commercial banks by 25 basis points (bps) to 6 per cent, even as industry expressed the hope that the second consecutive rate cut would translate into lower lending rates for both retail and corporate loans.The Reserve Bank of India's (RBI) lowering its repo, or short-term lending rate for commercial banks, just a week before the general elections, should help reduce interest costs on automobile and home loans, thereby giving a push to demand.The decision to reduce the interest rate was taken by a four-two majority vote in the RBI's six-member Monetary Policy Committee (MPC) at its first monetary policy review of the current fiscal.Additionally, the MPC also decided to maintain the "neutral" monetary policy stance it had adopted at its previous policy review in February, when it had shifted away from its earlier stance of "calibrated tightening". A "neutral" stance allows the central bank to move either way on rates."On the basis of an assessment of the current and evolving macroeconomic situation, the MPC decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6 per cent from 6.25 per cent with immediate Aeffect," the RBI said."Consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the bank rate to 6.25 per cent."These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of + or - 2 per cent, while supporting growth," the central bank statement said.The apex bank noted signs of weakness in domestic investment activity as reflected in a slowdown in production and imports of capital goods.A Consequently, it lowered the country's growth projection for 2019-20 to 7.2 per cent.Earlier, the second advance estimates for 2018-19 released by the Central Statistics Office (CSO) in February 2019 revised India's real gross domestic product (GDP) growth downwards to 7 per cent, from 7.2 per cent projected in the first advance estimates.
"Domestic economic activity decelerated for the third consecutive quarter in Q3:2018-19 due to a slowdown in consumption, both public and private," the RBI said.According to the central bank, the inflation path during 2019-20 is likely to be shaped by several factors, including lower food cost and fall in fuel prices, among others."Taking into consideration these factors and assuming a normal monsoon in 2019, the path of CPI inflation is revised downwards to 2.4 per cent in Q4:2018-19, 2.9-3.0 per cent in H1 (first half):2019-20 and 3.5-3.8 per cent in H2:2019-20, with risks broadly balanced," the RBI said.At its final bi-monthly policy review of the last fiscal, in February, the MPC had voted to lower its repo rate by 25 bps to 6.25 per cent."We hope that the two consecutive cuts in the repo rate would translate into lower lending rates for both retail and corporate credit. This would give an impetus to the domestic economy through greater consumption demand as well as private investments," industry chamber Ficci President Sandip Somany said in astatement."This is important as we do not foresee much impetus coming from external sources of growth as the global economy continues to show signs of moderation," he added. According to Rajeev Talwar, President, PHD Chamber of Commerce and Industry, the repo rate cut is expected to induce demand and spur economic growth.The transmission of the policy rate cut by the banking sector in terms of reduced lending rates would be crucial to induce demand and industrial growth in the country, said Talwar.India Ratings and Research's Principal Economist Sunil Kumar Sinha said: "However, as against our expectation of policy stance moving to accommodative, RBI kept it unchanged at neutral despite lowering its CPI inflation forecast downwards."Since the policy review in February, commercial banks have slightly lowered their marginal cost of funds-based lending rates (MCLRs), while RBI Governor Shaktikanta Das said that more required to be done in this direction."There has to be appropriate and effective transmission of rates," Das said following the announcement of the monetary policy review.The markets, however, gave a thumbs-down to the RBI decision. The S&P BSE Sensex fell 192.40 points or 0.49 per cent to 38,684.72 points, while the NSE Nifty50 declined 45.95 points, or 0.39 per cent, to 11,598 points.