Why Reserve Bank of India reduced the repo rate
This is the first decision taken by new RBI governor Shaktikanta Das.
The monetary policy committee of the Reserve Bank of India reduced its repo rate by 25 basis points to 6.25 per cent on February 7.
It is a move that would ease up lending to commercial banks, and help improve consumer behaviour. This is a maiden policy decision taken by Shaktikanta Das since he took over as RBI governor.
Here are the key takeaway points from the meeting:
The RBI reduced the lending rate, while also revising its views on inflation, arguing that it is on the lower end. Based on consumer prices, the RBI policy panel cut the inflation estimates for the first six months for the next financial year. The rate was reduced from 3.8 to 4.2 per cent earlier to now 3.2 per cent to 3.4 per cent. The central bank lowered its inflation estimates for the entire year as well.
However, it is important to also note that the consumer price index – one of the key indicators for inflation – remains low for food prices, but there is a sudden rise in the education and health component of the CPI. So the view about inflation from the RBI might not be complete.
The move would considerably lower the interest rates for loans, bringing down the EMI rates and, thereby, boost consumer spending. The committee in its note had said that the move to lower the repo rate was taken in order to increase private consumption and to “buttress private consumption”. Home loans, in particular, are widely expected to get cheaper.