In a surprise move, the Reserve Bank of India (RBI) cut the repo rate by 0.25 basis points to 7.5% on Wednesday morning with immediate effect. This is the second rate cut by RBI in the last three months.  

The rate at which the Reserve Bank of India(RBI) lends money to commercial banks against the pledge of government securities in the event of any shortfall of funds is Repo Rate. To temporarily expand the money supply, the central bank decreases repo rates through which banks can swap their holdings of government securities for cash.

The cut in repo rate comes four days after the presentation of the budget for 2015-16 and two days after the government and the Reserve Bank of India (RBI) announced that they have agreed to adopt a monetary policy framework, which will make taming inflation the primary priority of the central bank’s policy decisions.

The reduction in rate is likely to improve the availability of funds bringing in more liquidity to the system. This will also boost investment and demand growth in the industry.

Though inflation was a deterrent, the cut in repo rate by RBI will help in lowering interest rate for individual and corporate borrowers.

This move has renewed hopes of lower EMIs for home loan borrowers. To aid the expansion plans, companies are looking forward for the cheaper bank capital. However, cash reserve ratio (percentage of deposits kept in government securities) has remain unchanged at 4 per cent.

The government is transferring a significantly larger amount to the states, without entirely devolving responsibility for funding central programs.

Thus, the new framework will remove speculation ambiguities in the way RBI is making decisions on interest rates and the economy will recover at a steady rate.

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