RBI Cuts Rate for Third Time This Year

The Reserve Bank of India (RBI) cut interest rates for a third time this year on Tuesday.RBI cut the repo rate (short-term lending rate) from 7.5 per cent to 7.25, but left all other policy tools like cash reserve requirement unchanged at 4 per cent and Statutory Liquidity Ratio (SLR) at 21.5 per cent.

Going forward if more room builds up,we will have more room to take action: RBI Governor Raghuram Rajan.

Yielding to demands of Finance Minister Arun Jaitley and India Inc, RBI Governor Raghuram Rajan “front loaded” the repo rate cut despite worries of below normal monsoon and its impact on prices:PTI

Important Points

  • What Is Repo Rate? – The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI.
  • The reduction in the repo rate will lower cost of funds for banks and is a signal to them to reduce lending rates.
  • Home, auto and corporate loans are likely to cost less.
  • Experts felt that with today’s rate cut RBI has provided space for lowering lending and deposit rates.
  • Allahabad Bank became the first to reduce the lending rate by 0.3 per cent.
  • Many economists, inside and outside the government, suspect a new way used to calculate gross domestic product has overstated how fast India is rising.
  • The RBI also warned it would closely track inflationary trends, citing risks posed to food prices if monsoon rains are weaker than expected, or global crude prices recover, or the rupee weakens due to volatility in global markets.
  • Markets had already discounted a rate reduction and the after the move the broader Nifty stood 1.1 percent down from Monday’s close. The rupee was little changed at 63.76 per dollar, having ended Monday at 63.72.
  • The RBI reduction came just weeks after China made its third interest rate reduction in six months, but growth in India’s giant neighbour has been slowing down.