Muted growth prompts RBI to cut key lending rate to 6%

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Reverse repo rate has been adjusted to 5.75 per cent.

The Monetary Policy Committee (MPC) also made a decision to maintain the neutral monetary policy stance.

The RBI's six-member rate setting panel headed by RBI governor Shaktikanta Das on Tuesday started its 3-day monetary policy meet amid expectations of a cut rate to boost economic activities.

B Prasanna, Head - Global Markets group, ICICI Bank said, "The MPC decision taken today to cut the repo rate by 25 bps while keeping the stance neutral is a prudent and laudable one".

The Reserve Bank of India (RBI) on February 7 had last cut interest rate to 6.25 per cent from 6.5 per cent.

This is the second consecutive rate cut from RBI under new chief Shaktikanta Das, after a surprise rate cut in February. The other members of the MPC are Pami Dua, Ravindra Dholakia, Michael Debabrata Patra, Chetan Ghate and Viral Acharya.

SMEs, financial experts, and the industry, in general, is quite happy with the decision, as lower interest rate means that more consumers will now open up for loans. This is also the first back-to-back rate cut since the Monetary Policy Comittee (MPC) was formed in late 2016.

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"The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish", the RBI said in a statement.

Manish Lunia - Co-Founder at FlexiLoans said, "The rate cuts by the Central bank will act as a balm to the subdued economic activity components that have a lot of political and macroeconomic uncertainties to handle in the near to medium term".

No bank had lowered marginal-cost-based lending rate (MCLR) after February policy before RBI brass persuaded banks to do so. However, factory output data measured by the index of industrial production (IIP) slowed to 1.7 per cent in January from 2.4 per cent in December 2018.

With the SBI announcing last month that it will link its short-term loans and savings bank deposits to the RBI's repo rate, customers can hope that more banks will follow suit enabling a faster transmission to lower interest rates in the days to come.

According to ratings firm ICRA, the RBI could go for a 25 bps rate cut in the upcoming meeting of monetary policy committee.

"The MPC is likely to wait for further clarity on monsoon and its impact on food prices, the fiscal math of the new government, and the evolving dynamics in the global crude market before making its next move", he said in a note.

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