Amid speculations that a bigger 35 bps or even 50 bps rate cut might be announced owing to the current slowdown in Indian economy, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) cut the interest rate by 25 basis points (.25%)  under the Liquidity Adjustment Facility (LAF) for the third time in a row. The new repo rate, which is the key interest rate at which RBI lends money to banks, stands at 5.75% as compared to the previous 6.0%. This announcement was made today. You can read the press release here.

The reverse repo rate, the rate at which the RBI borrows money from banks, has been consequently adjusted to 5.50%. The Marginal Standing Facility (MSF) and bank rate has been attuned to 6%.

The MPC also changed the policy stance to ‘accommodative’. RBI mentioned that these decisions are in accordance with the objective of achieving the medium term target for Consumer Price Index (CPI) inflation of 4% within a band of +/- 2% while supporting growth.  The MPC revised its growth and inflation forecasts for the current fiscal year and found that the Gross Domestic Product (GDP) growth is only going downwards to 7% from the predicted 7.2%. The MPC expects a growth rate of 6.4-6.7% in the first half of financial year 2020 and 7.2-7.5% in the second half of the year.

Even the Consumer Price Inflation (CPI) for the first half of the financial year 2019-2020 has gone up to 3-3.1% from the earlier 2.9-3%. This is mostly due to unpredictable monsoon, hike in vegetable price, geo-political tensions and financial market volatility according to the RBI policy released today.

Overall, this repo rate cut will be comforting for markets especially in light of the economic slowdown.