The Reserve Bank of India (RBI) on August 7 cut the repo rate-its key lending rate-by 35 basis points to 5.40 percent and kept the door open for lowering rates further by retaining an "accommodative" policy stance, but flagged worries over weakening growth prospects. A repo rate cut allows banks to reduce interest rates for consumers on loans.
Amar Ambani, head of research at Yes Bank, said the market's reaction was largely muted as equity markets had already priced in a potential 50 basis point cut.
In fact, analysts at Bank of America Merrill Lynch (BofA-ML) had expected the central bank to slash rates by exactly 35 bps.
"This is an extremely encouraging move and clearly highlights the intent of the central bank to impart greater momentum to India's growth trajectory.", said Sandeep Somany, president Federation of Indian Chambers of Commerce and Industry.
The statement further announced that the RBI has chose to raise a bank's exposure limit to a single NBFC to 20 per cent of Tier-I capital of the bank.
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RBI said an uptick in food inflation can not be ruled out due to uneven distribution of monsoon, adding that volatile crude prices also have some impact on fuel prices.
The RBI now expects India's real or inflation-adjusted gross domestic product (GDP) to grow at 6.9 percent in 2019-20, lower than 7 percent it had projected in June.
Senior executives from at least three NBFCs, however, said the moves announced by the RBI on Wednesday, coupled with other recent changes, were unlikely to ease the pressure substantially. The unconventional rate cut and the unchanged stance may also signal the central bank's willingness to make room for future rate cuts. RBI Governor Shaktikanta Das said the repo rate cut was balanced and a reduction of 25 basis points would have been inadequate, PTI reported. In these times of uncertainty-especially in global trade, geopolitics and currency markets-the central bank has provided certitude on at least one count: rate hikes are definitely off the table for now. The Consumer Price Index retail inflation was projected at 3.1% for the second quarter of the financial year while CPI-based inflation in the first half of the next financial year was projected at 3.6%.
Benchmark interest rate was cut by 0.35 per cent to 5.40 per cent from 5.75 per cent amid low inflation, faltering economic growth and uncertain global scenario. "When things are put in black and white, it does matter", said Dharmesh Kant, head of research at Indianivesh Securities Ltd.
"It is our endeavour to ensure that there is no collapse of a large or systemically important non-bank finance company", RBI governor Das said.