RBI keeps repo rate unchanged: Key things to know

Andrew Cummings
August 6, 2020

The Monetary Policy Committee (MPC) of the Reserve Bank of India on Thursday made a decision to put a pause on further rate cut for now in the latest bi-monthly monetary policy review. According to Upasana Bhardwaj, an economist at Kotak Mahindra Bank, in addition to the rate cut, RBI may also make some announcements regarding liquidity and regulatory measures.

Monetary Policy Committee (MPC) kept the repo rate unchanged in the August policy.

He also said that the reverse repo rate was also kept unchanged at 3.35 per cent, while the marginal standing facility (MSF) rate and the bank rate remained unchanged at 4.25 per cent.

The central bank has been taking steps proactively to limit the damage to the economy caused by the pandemic and subsequent lockdowns.

Around two-thirds of economists in a Reuters poll expect the Reserve Bank of India (RBI) to cut the repo rate INRREPO=ECI by another 25 basis points (bps) on August 06 to a record low of 3.50 per cent, and once more next quarter. Governor Shaktikanta Das said the MPC voted to keep interest rate unchanged and continue with its accommodative stance to support growth. On the economic growth front, Governor Das said, without putting any number to it, that India's real gross domestic product would contract in the first half of FY21 as well as full financial year. "Global economic activity has remained fragile".

Supply chain disruptions persist; inflation pressures evident across segments, says RBI Governor Das. The RBI governor added that the MPC will remain watchful of the inflation dynamics to further use available space when appropriate. This in itself is the fastest policy rate transmission in India, many believe.

The RBI has already reduced the repo rate by a total of 115 basis points since February, on top of the 135 basis points in an easing cycle past year, from 6.50 per cent, responding to slowing growth.

SBI's Ecowrap report stated that an August policy rate cut is unlikely as of the total repo rate cut of 115 bps since February, 71 bps - 85 bps in case of large banks - has been transmitted to customers. The finance ministry is actively engaged with the RBI on this.

The six-month moratorium given by the RBI ends on August 31. Of the 10, three expected a cut, while seven said there would be a pause. A Bloomberg survey of 44 economists, however, had seemed leaning slightly more on a rate reduction. "Nonetheless a pause on rates is also backed by cumulative 115 basis-point- cut and concerns over inflationary expectations", said Radhika Rao, economist at DBS Group Research.

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