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Reserve bank of India unexpectedly cut the repo rate by 25 basis points to 6.25%

The Reserve Bank of India (RBI) also known as India’s Central Bank today has eased the key interest rate by 25 basis point unanimously. The decision made on the first ever RBI policy meeting conducted by the new RBI chief Shaktikanta Das.

As per the statement released by the RBI officials, the decision of easing the key interest rate taken on account of boosting the slowing economic condition of the nation. We, all know that the current ruling party BJP (Bharatiya Janata Party) under the leadership of Mr. Narendra Modi.

Decision Taken to Tackle the Inflation Rate

Experts from worldwide strongly believe that the decision of reducing the key interest rate by 25 basis point from 0.25% to 6.25% is welcome news for the current Prime Minister of India Mr. Modi, as the ruling party is expected to face the general election on coming May.

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The move of reducing key interest rate will ease the bank interest rates on Auto Loans, Home Loans, and so. By doing so, the BJP government will boost the lending from banks and showcase the lift growth which will be a great impact on the upcoming election.

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To be frank, the ruling BJP has already submitted its last budget on past February 1st, 2019 with various attractive features like dealt out for farmers, a tax cut for middle-class families, and so. Now, the new RBI policy will too get amend in that list as larger lending for lifting growth.

Policy Statement Set by RBI on 07th February

According to the RBI news, the pace of the core inflation rate of the nation has faced steady downfall since the June month of 2018. The statistical value shows as the core inflation rate pointed around 5.7% in the last month of the year, December 2018.

Meanwhile, the consumer inflation rate marked as 2.19% which is 18 months low and well below than the par level 4% set by the federal bank of India.

Similarly, the nation’s economic growths too fall steeply from 7.5% to 7.1% which is far below than the expected level. The impact was mainly because of slower consumer inflation. In order to downplay the risk of inflation raise in the Indian market, the Monetary Policy Committee (MPC) has decided to reduce the key repo rate by 25 basis points.

While, addressing to the media persons the current new chief of RBI Mr. Das quoted that if the inflation level remains steadily around 3.9 % to 4% in the next 12 month time period, then there would be a lot of room to act and people can expect more such rate cuts.

Highlights of Monetary Statement released by RBI for 2018-2019

  • Key lending rate cuts by 0.25% to 6.25%
  • Reverse Repo Rate cut down to 6%
  • Bank rates cut down to 6.5%
  • CRR remains unchanged at 4%
  • Aimed GDP growth for next fiscal 7.4% from 7.2% for 2018-19
  • Collateral Free Agri loans hiked to Rs. 1.6Lakhs.
  • No restrictions for foreign portfolio investors to invest in the corporate debt market.
  • Next MPC meeting will be on April 2 – 4 of 2019.

Is really government hand behind this rate cut?

The recent act of repo rates cut taken by the RBI India triggers the thought of current ruling government pressure might force RBI to make such a decision. As per the news collected from the trusted resource, 4 members of the MPC voted to cut the repo rates meanwhile the remaining 2 members prefer to stand on the decision.

The most important point to note down is, the recently held MPC meeting was the first-ever meeting conducted by the DAS as the new governor of RBI and it was closely monitored by various authorities as the precious chief Urjit Patel has quitted his position because of the tension prevails between the government and RBI.

It is widely believed that the Urjit Patel strongly disagree the move of relaxing the lending curbs from the banks which were forced by the central government of India, owing to that pressure Patel resigned from his designation.

What is Repo Rate?

Repo is a repurchase agreement made in-between the central bank of India, RBI, and the nationalized commercial banks.  The Repo rate mainly refers to the rate at which the commercial bank borrows the money from the RBI during the shortage of funds.

A repo rate plays a vital role in regulating the money supply and inflation level and also controlling the liquidity level in the country. In simple words, a repo rate creates a strong impact on the nation’s economic growth.

What is the Reverse Repo Rate?

As name Reverse Repo Rate, it is completely opposite to the repo rate. The term reverse repo rate is the rate at which the federal bank of India; RBI borrows money from the commercial banks within the country.

Increasing reverse repo rate will decrease the money supply in the market and commercial banks will get higher interest rates for keeping their funds with the RBI.

What is the Cash Reserve Ratio (CRR)?

The CRR (Cash Reserve Ratio) defines the amount of cash determined by the Indian commercial banks to keep with the Reserve bank of India. The increase in CRR will lead banks to increase their loan interest rate and the decrease in CRR will lead to low inflation by reducing the money supply in the market.

What is triparty repo?

Well, the triparty repo performs the similar thing which the Repo rate does, however, the deal in-between the two parties will be intermediated by the third party normally referred to as clearing bank.

The triparty repo will ease the administrative difficulties faced by the two parties involving in the repo transaction.

Impact of Rate Cut

The impact of the current rbi repo rate cuts implemented by the RBI with immediate effect as illustrated in the below-listed image by assuming the bank following the defined rate cuts of RBI

The above-mentioned details gathered from the official website of SBI by keeping the loan amount as Rs. 30 Lakhs.

Take a look of India’s sliding interest rates for past 4+ years.

 

Expert’s Point of View on this key interest rate cut

The chief economist of L&T finance Rupa Rege Nitsure points the RBI move on key interest rate cuts as “the perfect policy response in the reflection of the current circumstance”.

The chief economist of HDFC bank responded to the new rbi policy as “To see this as a capitulation of the government’s demands is profoundly misguided

Once, the rate cut announcement came from the federal bank of India. The Indian rupee falls to 71.69 to the dollar value and regained slightly and reached a steady position of Rs. 71.42 at the end of the day.

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