As expecte, RBI Governor, Raghuram Rajan, today cut the Repo Rate by 25basis points in the central bank’s monetary review policy. The repo rate reduced from 7.5% to 7.25%.   

In 2015, this is the third time when RBI reduced the repo rate. The central bank had earlier cut repo rate twice this year, both times outside the policy announcement. Cash Reserve Ratio (CRR) remains unchanged. The Central bank kept the CRR at 4% without any change. This rate cut shall put India in a similar monetary path as of China.

This cut will provide much-needed stimulus to the economy. As per RBI statement, “Strong food policy and management will be important to help keep inflation and inflationary expectations contained over the near term.” The rate cut mainly targets the infusion of bank capital into scheduled public sector commercial banks, especially those that implement concerted strategies to clean up stressed assets. This shall adequately increase the credit flows to the productive sectors as investment.

Assuming reasonable food management, the bank said, inflation is expected to be pulled down by base effects till August but to start rising thereafter to about 6.0 per cent by January 2016 – slightly higher than the projections in April. However, a deficient or irregular monsoon during the crucial June-September period could well undermine agricultural prospects, adding to food inflation. Thus, a good monsoon this year shall be important to keep the prices under control.

The demand of rate cut was from the industry but undoubtedly, Modi Government has contributed and urged for this rate cut.

Though there has been two rate cuts this year but most of the banks refrained from passing on the benefits to consumers. Few banks like SBI, HDFC, ICICI, Axis Bank reduced the rate but not all. Now, after the third cut in repo rate, it is highly expected from all the banks to pass on the benefits to its customers. If it happens then there shall be rise in the slack credit demand.

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