Explained: Why RBI may cut interest rates tomorrow and why it may not be enough

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News:The Reserve Bank of India’s Monetary Policy Committee is set to announce its bi-monthly policy review on October 4,2019.

Facts:

What is likely to happen in the policy review?

The RBI is likely to cut the repo rate by anywhere between 35 to 40 basis points due to following reasons-

  • Inflation is under control.Hence,there is room to reduce interest rates without fueling a surge in the price level.
  • The transmission of the repo rate is also weak so a deeper cut is required to achieve the goal.
  • The government has just cut corporate tax rates in its bid to incentivise more investments.Therefore,cutting interest rates will further help that goal as it would make it cheaper to borrow money.
  • Further,the larger rate cut will also allow banks which are not willing to link interest rates to the repo rate for quicker transmission of rate cuts.

Will rate cut help to boost economic activity?

  • Experts have said that the repo rate cut may not help Indian economy to a far extent as Indian economy is facing its worst slowdown since the dip in economic activity following the global financial crisis of 2008-09.

Additional information:

About Monetary Policy Committee(MPC):

  • The Monetary Policy Committee(MPC) is a committee of the Reserve Bank of India.
  • The MPC is made up of six members with three nominated by the Union government and three representing the RBI.
  • The MPC is mandated by law to ensure that retail inflation stays within a band of two percentage points of the target inflation rate of 4%.

Repo rate:

  • Repo stands for ‘Repurchasing Option’.It refers to the rate at which commercial banks borrow money from the RBI.