5 reasons why RBI cut repo (interest) rates

Published: Friday, May 3, 2013, 11:21 [IST]

The Reserve Bank of India, which met today to review its monetary policy, cut repo rates (rates at which it lends money to banks) by 0.25 per cent. Here's why India's central bank cut the rates.

1) Falling inflation

Wholesale price inflation for March came in at 5.96 per cent, the lowest in the last three years. In the past, inflation has been the prime reason why RBI did not cut rates aggressively. With inflation falling, RBI decided to cut rates.

2) Low growth rates

Economic growth rates in India have fallen and the GDP has come in at just 4.5 per cent for the quarter ended Dec 31, 2012. This is the lowest growth rates seen in a decade. A cut in interest rates will spur investment and help growth.

3) Crude oil prices are falling

Crude oil forms the largest component of our imports. Falling crude prices would help reduce are imported inflation. Brent crude has now fallen from $118 a barrel to $100 a barrel.

4) Falling gold prices

Gold have reduced from their pean levels in 2011. Reduced import of gold through a drop in prices would ensure lesser pressure on the current account deficit and hence on the Indian rupee. A strong Indian rupee would reduce our import bill.

5) Reviving the investment cycle

Higher interest rates are a deterrent for fresh investment from corporates. A drop in interest rates would help push the investment cycle and hence growth rates in the economy. The RBI may have been prompted to drop rates to push the investment cycle.

GoodReturns.in

Story first published: Friday, May 3, 2013, 11:21 [IST]