Monetary Policy tweaks by RBI

The Reserve Bank of India (RBI) reduced the interest rate by 35 basis point (0.35%). This is the fourth successive reduction in the repo rate.

What is the repo rate?

  • The repo rate is the rate at which the RBI lends to the banks of the country.
  • Repo rate is one of the sources of the lending amount available to the banks of the nation.
  • This money is then used by the banks to finance their day to day lending.
  • ?A higher repo rate would make lending credit dearer to the banks which would increase the costs of loans and EMIs.
  • A lower repo rate would make borrowing cheaper as credit becomes cheaper for the banks to obtain.

What has happened?

  • The repo rate has been reduced by the government by a total of 110 basis points this year (a total of 1.1%).?
  • The reductions have been done in an attempt to boost the economy which is currently growing at its slowest pace in over 5 years.

How does the RBI decide the Repo rate?

  • The repo rate (RR) is decided by the Monetary Policy Committee (MPC).
  • The MPC comprises of 6 members (3 officials of the Reserve Bank of India and 3 external members nominated by the Government of India).
  • The ex officio chairperson of the committee is the Governor of the RBI.
  • All decisions are taken by a majority with the Governor having the casting vote in case of a tie.

Other trends

RBI had reduced the growth projections for the Indian economy to just 6.9% in the current FY lower than its 7% forecast given in June.

The slow is growth is mainly due to the slowdown in demand and in investments.

 

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