The Reserve Bank of India (RBI) Governor Urjit Patel speaks during a news conference after the bi-monthly monetary policy review in Mumbai, India, October 4, 2016. Photograph: (Reuters)
A fall in the repo rate should ideally reduce the lending rate and improve investments in India
Reserve Bank of India's (RBI) new management today cut the repo rate by 25 basis points as it released the monetary policy for this quarter.
In a first, the policy has been decided by recently constituted monetary policy committee (MPC), a committee of six members that included three independent experts, apart from RBI Governor Urjit Patel and two senior officials from the central bank's monetary policy department.
The central banking institution's committee has decided to reduce the repo rate by 25 basis points from 6.50 per cent to 6.25 per cent. It's pertinent to mention that the repo rate, a monetary policy tool to control inflation, is the rate at which the commercial banks borrow from the central bank.
A fall in the repo rate should ideally reduce the lending rate and improve investments in India. However, a look at the past figures reveals that a fall in repo rates has hardly ever translated into a subsequent fall in lending rates.
Lately, RBI has been sluggish in changing the interest rates as it shifted its focus from multiple indicator targetting to inflation targetting, a change suggested by the Urjit Patel Committee itself. Patel took charge as the governor of the central banking institution last month.
The repo rate, a monetary policy tool to control inflation, is the rate at which the commercial banks borrow from the central bank.
Revealing the details, RBI's official statement read: ‘The decision of the MPC is consistent with an accommodative stance of monetary policy in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 (quarter 4) of 2016-17.’
The official statement also stresses that the International factors have also played an important role in influencing the current monetary policy. Some of these factors are: