RBI Might Perhaps Make Another Policy Rate Cut of 25 bps on 4th October

RBI Might Perhaps Make Another Policy Rate Cut of 25 bps on 4th October

The Reserve Bank of India may currently make another rate cut on 4th October. This cut of up to 25 bps shall be the 5th in a row by the apex bank. Shaktikanta Das, the RBI Governor heads the Monetary Policy Committee (MPC) would make an announcement the fourth bi-monthly monetary policy for 2019-20 recently after its three-day meeting.

The apex bank may announce the rate cut to complement government's measures such as reducing corporate tax as well as promoting credit off-take in order to boost economic activity during the festive season in the midst of a slowdown.

The financial market expert had stated that the magnitude of the repo rate cut is going to be lower this time as the RBI has cumulatively cut it by 110 basis points in the calendar year up to now.

The prevailing retail inflation reading at 3.21% for August, which is lower than the mandated 4% inflation target, gives the RBI headroom to cut rates to encourage growth.

The RBI might also want to make out how the new lending rate regime, linking banks’ retail as well as micro and small enterprise loans towards an external benchmark with effect from 1st October, responds to a rate cut in the background of sufficient liquidity in the banking system.

Repo rate is basically the interest rate at which the central bank offers liquidity to banks in order to overcome short-term liquidity mismatches. At present, this rate is at 5.40%.

The central bank has by now slashed the repo rate (short-term borrowing rate) four times aggregating towards 1.10 percentage points since January. At its preceding meeting in August, the MPC had slashed the benchmark lending rate by an unusual 35 basis points to 5.40%.

The forthcoming MPC meeting had been held in the setting of the RBI's mandate to banks towards linking their loan products to an external benchmark, such as repo rate, for faster transmission of reduction in policy rates to borrowers from 1st October. Ahead of the meeting, RBI Governor Shaktikanta Das had headed the Financial Stability and Development Council (FSDC) sub-committee took stock of the existing macroeconomic situation. Previously, the RBI Governor had stated the government has small fiscal space, giving hopes that the RBI might provide additional monetary stimulus to support and boost the economy.


The government's financial space was squeezed on account of cut in rates of corporate tax and lowering of GST on various items. Revenue collection also has been much lowering as per the Budget estimations. Experts held that one more rate cut is expected as the government is tied and the onus of taking initiatives at the present rests with the Reserve Bank.

It was stated that the government has taken a series of measures in the last few weeks in order to drive structural changes in the Indian financial system. Though, most of these are facilitating provisions to ease supply-side pressures whereas the main challenge of reigniting demand remains. Therefore,  it could be hoped that the Reserve Bank’s slashing the key signaling rate of repo by 25 bps to 5.15% next week shall be carried out in order to complement the government's economic stimulus.

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eStartIndia Team

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