- Six-member monetary policy committee (MPC) headed by RBI Governor lowered the repo rate by 25 basis points to 6.25 per cent, repo or repurchase rate is where RBI lends money to commercial banks.RBI last cut rates in August of 2017.
- RBI has taken this decision because India’s consumer price based inflation is averaged at 3 per cent in last five months against RBI’s Parliament-mandated target of 4 per cent.
- The apex bank has also changed its stance to neutral from calibrated tightening (which effectively rules out a rate cut)
- With the RBI cutting interest rate, the banks may pass the benefit to customers and slash their marginal cost of funds based lending rates (MCLR). MCLR refers to the minimum interest rate that a bank will charge on the loan; it cannot lend below this rate.
- The transmission of this rate cut should reduce the borrowing costs of retail borrowers, MSMEs and corporates, thereby boosting private consumption. This will help in achieving the interim budget’s objective of stimulating private consumption and housing demand.
- Growth projections falling in the range of 7.2-7.4%, from 7.5% posited in the RBI’s December statement due to contracted production and import of capital goods, shortfall of 4% in rabi sowing across various crops and slowdown in farm output growth.
- RBI’s policy fails to make any statement regarding fiscal prudence and there is a fear that government’s fiscal deficit target of 3.4 percent for next fiscal was a bit too optimistic and the excess borrowing could lead to higher inflation.
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