August 2, 2017
The Reserve Bank of India (RBI) announced interest rate cut today by reducing the repo rate by 25 bps to 6% from 6.25%. The repo rate, the rate at which banks borrow money from the RBI due to any shortfall of funds, is at its lowest since 2010. The central bank decided to cut rates as a result of weak demand and sharp fall in inflation.
The decision of the RBI to cut repo rate will now exert pressure on the banks to lower their lending rates of personal, auto and home loans. Analysts and bankers were anticipating the rate cut as the European Central Bank and US Federal Reserve will soon begin their unwinding measures.
The central government has been urging the RBI to reduce rates for a while but its response to this rate cut was guarded, as reported by the Economic Times.
“We welcome the 25 bps cut in the repo rate as an important step necessary to converge toward the appropriate real monetary conditions for sustained growth consistent with India’s potential and for stable, moderate inflation,” said economic affairs secretary Subhash Chandra Garg.
Inflation based on the consumer price index (CPI) fell to a record low of 1.54% in June this year and hence the government urged the central bank to cut rate. However, RBI expects inflation to rise from the current lows over the rest of the year and hence its Monetary Policy Committee (MPC) persevered with the neutral stance during its review.
Urjit Patel , the governor of RBI spoke to reporters about the MPC’s commitment to keep inflation close to 4%.
“With several factors contributing to uncertainty around the baseline inflation path, implementation of farm loan waivers, the after-effects of GST, the timing of implementation of salary and allowance revisions by state governments, the MPC emphasised its commitment to keeping headline inflation close to 4% on a durable basis.”
The reverse repo rate was also readjusted by the RBI to 5.75%. It is the rate at which RBI borrows funds from banks.
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