The Reserve Bank of India (RBI) today cut repo rates by 25 basis points, largely in line with expectations.
The repo rate or interest rates at which the RBI lends money to banks, now stands reduced by 25 basis points to 5.75 per cent. The cut may have come against the backdrop of sharply slowing growth, and inflation well below the RBI's targeted level.
"On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee (MPC) at its meeting today decided to: reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.75 per cent from 6.0 per cent with immediate effect.
Consequently, the reverse repo rate under the LAF stands adjusted to 5.50 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.0 per cent," the RBI said in a release.
What was also interesting is that the MPC also decided to change the stance of monetary policy from neutral to accommodative.
One of the key reasons for slashing interest rate, would have been slowing growth. "High frequency indicators suggest moderation in activity in the service sector. Sales of commercial vehicles, tractors, passenger cars, and three and two wheelers contracted in April. Railway freight traffic growth decelerated. Domestic air passenger traffic growth contracted in March, but turned around modestly in April. Two key indicators of construction activity, viz., cement production and steel consumption, slowed down in April. The PMI services index moderated to 50.2 in May on subdued growth of new businesses," the RBI noted in its release.
Interest rates on loans may fall
The slash in interest rates by the RBI may also push loan rates lower. Home loans, auto loans and gold loans may drop. Interestingly, interest rates on fixed deposits may also fall. This is not good for retired folk, who depend on interest income for sustaining. Overall, the policy is a measure aimed at boosting growth. RBI Cuts Repo Rate By 25 Basis Points To Boost Growth