The Reserve Bank of India on Tuesday cut its key rates after the first monetary policy review meet headed by the bank's new governor Urjit Patel. The repo rate – the rate at which the RBI lends to commercial banks – has been brought down 25 basis points (or 0.25%) to 6.25%. The repo rate helps control inflation, which is one of the central bank's major concerns.
The reverse repo rate, which commercial banks use to charge the RBI, is now 5.75%. At the apex bank's last review meet in June, RBI governor at the time Raghuram Rajan had kept key rates unchanged.
Patel said the International Monetary Fund is likely to further downgrade its global growth outlook, The Financial Express reported. Growth in the European Union also remains uncertain, he said, adding that the RBI will also watch for the outcome of the United States presidential elections in November. The RBI governor further said that 65% of the financial stress in public-run banks were contributed by five sectors, and the central bank will deal with the situation pragmatically.
This is the first time the RBI broke from its tradition of the governor deciding the key rates. Members of the newly-formed, six-member Monetary Policy Committee voted unanimously to reduce rate, at its meeting that began on Monday. RBI Governor Urjit Patel has a casting vote in the panel in case of a tie.
The decisions made at the bi-monthly credit policy meet were in line with expectations. Bankers were looking forward to a policy rate cut by 25 basis points, according to The Economic Times. The rate cut will usher in cheaper bank loans.
Retail inflation, which is a deciding factor for policy rates, was at 5.05% in August, the lowest in six months. The last time the RBI had cut its policy rate was in April. But the central bank maintained status quo since then, keeping in mind its target to bring inflation down to 5% by March 2017. The next meeting of the Committee will take place on December 6 and December 7.