Amid subdued growth levels which saw June quarterly numbers nosedive to six-year low of 5% and inflation within comfortable levels, there remained high expectations that the centre will announce key rate cuts.
Repo rate: And in line with the earlier measures to boost the economy such as the waiver of surcharge announced in case of FPIs and the recent grave corporate rate cut, govt. again for the fifth consecutive time has reduced repo rate by 25 basis point, with it the repo rate are now at 5.15%. Of the 6-member committee, only 1 favoured a 40 bps rate cut.
The policy stance has been largely dovish and accomodative to maintain fiscal stabilty. Reverse repo rate now stands at 4.9%. Also, the RBI said the rate cut measure shall continue until warranted so we can't expect a wait and watch policy after December MPC meet.
MSF and bank rate adjust to 5.4%
In the first place, unanimous belief remained high that the central bank is close to reaching a terminal rate of 5% by the end of December which shall then be followed by a brief pause.
Growth forecast for FY20: On the growth front, as the ongoing FY saw GDP numbers crack to its lowest in six years for Q1FY20, the centre has further reduced its growth forecast for the FY20 to 6.1%. In the previous policy review meet, it lowered growth forecast to 6.9% for the FY 2019-20. The majority of economists and bankers polled expect a revision in growth to 6.5% for the FY'20. For the H2 FY20, the growth has been revised lower to 6.6-7.2%
April to June 2021, growth rate cut by 0.2% to 7.2%.
Inflation forecast: Inflation levels have been retained at the previous levels i.e. 3.5-3.7% for the H1FY20. Though there remains a pressure on the headline inflations, the numbers are still in the comfortable range with food inflation for the month of August trending somewhat higher while core inflation excluding fuel and food inflation inched lower.
FY21 inflation target at 3.5-4.1%
Crude oil price has also remained under control so taking into account the above average monsoon which shall not augur well for the Kharif crop, the rate cut is justified.
Fiscal deficit: In a bid to promote private investments and spur Make In India initiative, the government's recent corporate tax rate cut move will widen the fiscal deficit by 40 basis points more than the budgeted levels of 3.3% of GDP. The gap shall even be higher on account of the shortfall in GST revenue collection which slipped below levels of Rs. 1 lakh crore. Now, the fiscal deficit has been revised to be maintained at 3.3.% of GDP as given out in the budget estimates.