Unconventional rate cut due to weakening growth says RBI Governor

New Delhi, Aug 22: Weakening of domestic growth impulses prompted the Reserve Bank of India (RBI) governor Shaktikanta Das to opt for an unconventional rate cut of 35 basis points (bps) to push economic activities early this month, said the central bank on Wednesday.

Two of his RBI colleagues and an independent member in the rate-setting Monetary Policy Committee (MPC) had also favoured a 35 bps reduction, against the normal practice of 25 or 50 bps change, in the third bi-monthly monetary policy of 2019-20.

The other two members, both independent, in the six-member MPC had voted for a 25 bps cut in the policy announced on August 7.

In an unusual move, the RBI on August 7 had reduced the benchmark lending rate by 35 bps to 5.40 per cent amid concerns over slowdown in economy. Before this, the RBI had reduced the rate thrice, each time by 25 bps.

"In view of weakening of domestic growth impulses and unsettled global macroeconomic environment, there is a need to bolster dwindling domestic demand and support investment activity, even as the impact of past three rate cuts is gradually working its way to the real economy," said the governor, according to the minutes of the MPC released by the RBI on Wednesday.

The governor said that with headline inflation projected to remain within the target over the next one year, supporting domestic growth by further reducing interest rates needs to be given the utmost priority.

Given the current and evolving inflation and growth scenario at this juncture, it can no longer be a business-as-usual approach, he added.

"The economy needs a larger push. I am, therefore, of the view that a reduction in the policy repo rate by conventional 25 bps will be inadequate. On the other hand, a 50 bps rate cut might be excessive and indicate a knee-jerk reaction," he said.

According to the minutes, Das further said "hence, at times it is apposite" to calibrate the size of the conventional rate adjustment, and he voted for reducing the policy repo rate by 35 bps and for continuing with the accommodative stance of monetary policy.

MPC members Bibhu Prasad Kanungo (RBI deputy governor), Michael Debabrata Patra (RBI executive director) and Ravindra H Dholakia (independent member) also favoured a 35-basis point cut in repo rate.

Chetan Ghate and Pami Dua voted for a 25-basis points reduction in the repo or the short-term lending rate.

While the RBI has lowered the repo rate by 1.1 percentage points in 2019, the banks are yet to pass on the entire benefit of lower interest rate to borrowers.

Governor Das recently asked all banks to link their interest rate with repo for faster transmission of the central bank's policy actions.