RBI Monetary Policy Review: MPC Cuts Interest Rates By 25 Basis Points

The Reserve Bank of India (RBI) today cut repo rates or interest rates by 25 basis points, doing so for the 5th straight time. The repo is the rate at which the country's central bank lends money to the commercial banks in the country.

After today's move, the repo rate now stands revised to 5.15 per cent from the earlier 5.40 per cent. Most analysts had expected a similar rate cut and probably one more rate cut in the month of December. With inflation in the economy benign and growth seeing a slump, the country's central bank's action was widely expected.

While the RBI cut lending rates to banks several times in the past, banks have been reluctant to transmit those rates. It is likely that banks maybe forced to cut lending rates going forward.

However, beyond December, one would have to wait and watch for inflation data, given that food prices may move higher going ahead, given an increase in prices of items like onions.

The Monetary Policy Committee is largely mandated to keep inflation in mind, before pronouncing any major change. Given that growth rate has slumped an action was almost always expected.

All members of the MPC voted to reduce the policy repo rate and to continue with the
accommodative stance of monetary policy. Dr. Chetan Ghate, Dr. Pami Dua, Dr. Michael
Debabrata Patra, Shri Bibhu Prasad Kanungo and Shri Shaktikanta Das voted to reduce the repo rate by 25 basis points. Dr. Ravindra H. Dholakia voted to reduce the repo rate by 40 basis points.

The RBI has also revised downwards its GDP forecast to 6.1 per cent from 6.9 per cent, taking into consideration various factors.

Today's action by the RBI may help to reduce lending rates by banks, which means loans on auto, gold and personal loans could fall, provided the banks transmit the same.

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