In the maiden bi-monthly monetary policy meet of the financial year 2019-20, the Reserve Bank of India [RBI] decided to slash repo rate by 25 basis points (bps) or 0.25 percent to 6 percent. The RBI has maintained the policy stance at neutral.
Shaktikanta Das, the RBI Governor headed Reserve Bank’s six-member rate setting panel begun its 3-day monetary policy meet with the expectation of slashing rate to boost economic activities. This is also the first back-to-back rate cut since the Monetary Policy Committee (MPC) was formed in 2016.
Das already held meetings with stakeholders that included industry bodies, depositors association, MSME representatives and bankers. The Reserve bank has taken multiple steps to support economic growth and spur lending since Das took over from the outgoing RBI Governor Urjit Patel.
With inflation well below the RBI’s mandate of 4 percent and a push towards the economic activities amid fears of global economic slowdown supported the RBI’s move.
The central bank had reduced the repo rate by 25 basis points in February, after a gap of 18 months. The interest rate cut would provide relief to borrowers in the election season.
Repo rate is the rate at which the central bank lends short-term money to the commercial banks. And, the reverse repo rate is the one on which the RBI borrows money from the commercial banks. The reverse repo rate has also been reduced to 5.75 percent from 6 percent earlier.
The Banks take cue from RBI’s monetary policy stance in hiking or cutting lending rates. For instance, if the Reserve Bank lowers repo rate, banks are expected to pass on the benefit to retail customers.
With back-to-back rate cuts, home, auto or personal loan EMIs (equated monthly installments) are likely to go down.
The RBI’s decision comes a week before the general election kicks off on April 11, in which Prime Minister Narendra Modi will seek a second term in office.