RBI cuts key repo rate to 6.5% in a move that could boost private investments
Finance Minister Arun Jaitley had pitched for a lower rate, saying inflation is under control and the government has stuck to its fiscal deficit targets.
The Reserve Bank of India on Tuesday lowered the repo rate – the rate at which it lends to commercial banks – to 6.5%. RBI Governor Raghuram Rajan made the announcement during the first of the central bank’s bi-monthly monetary policy reviews in the new financial year. According to NDTV, the quarter percentage point-cut takes the rate to the lowest it has been since January 2011. In the previous monetary policy review on February 2, the repo rate was kept unchanged at 6.75%.
The repo rate helps control inflation, which is one of the RBI’s major concerns. A higher repo rate means banks have less incentive to borrow from the central bank, reducing the money supply in the economy and thus keeping inflation in check.
On Monday, Finance Minister Arun Jaitley had pitched for lower interest rates, saying inflation was under control and the government had “stuck to its fiscal deficit commitments”, PTI reported. Jaitley was addressing the annual session of the Confederation of Indian Industry when he made the appeal, saying such a move would boost the economy as it would encourage private investments.
While the repo rate cut was predictable, the RBI surprisingly raised the reverse repo rate – or the rates commercial banks charge the central bank – by 25 basis points to 6%.
The RBI left the cash reserve ratio rate unchanged at 4%, though it reduced the minimum daily maintenance of the the CRR from 95% of the requirement to 90%. The CRR is the minimum percentage of deposits that banks have to hold in cash or as deposits with the central bank. This is also used to control money supply in the economy.
It also predicted a growth rate of 7.6% for the financial year 2016-17.