Repo rate lowered by 25 bsp to 6%

Context

  • In a major policy shift, the six-member monetary policy committee (MPC) headed by Governor Shaktikanta Das on 7 feb 2019 lowered the repo rate by 25 basis points to 6.25 per cent in a 4-2 vote.
  • RBI has thus cut rate for the first time in 17 months. The last rate cut happened in August 2017.
  • Headline inflation is projected to remain soft in the near term reflecting the current low level of inflation and the benign food inflation outlook. Consumer price inflation is seen at 2.4 in January-March period and 3.2-3.4 per cent from April to September.
  • The shift in stance to neutral provides flexibility to meet growth challenges.
  • The change in stance also signals higher chances of more cuts in the coming months if inflation persisted within tolerable limits.
  • A large part of the current investment recovery has been driven by government spending and it was necessary to broad base the revival with a private sector boost.

Repo Rate and Reverse Repo Rate

  • Repo rate is the rate at which RBI lends to its clients generally against government securities.
  • Reduction in repo rate helps the commercial banks to get money at a cheaper rate and increase in repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.
  • Reverse repo rate is the rate at which RBI borrows money from the commercial banks.
  • The increase in the repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit.
  • As the rates are high the availability of credit and demand decreases resulting to decrease in inflation.
  • This increase in repo rate and reverse repo rate is a symbol of tightening of the policy.

Other announcements made by RBI

  • The limit of collateral free bank loans for farmers to Rs 1.6 lakh from Rs 1 lakh.
  • Greater operational freedom for Banks to offer interest rates to bulk deposits.
  • The definition of “bulk deposits” has been increased to Rs 2 crore from Rs 1 crore currently.
  • The headline inflation is likely to persist within the RBI’s tolerable level of 4 per cent.
  • While the decision to change the monetary policy stance was unanimous, Deputy Governor Viral Acharya and another MPC member, Chetan Ghate, voted for status quo in interest rates, while Das and three others voted for a cut in interest rates.

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