Monetary Policy Committee Notifications

RBI has cut lending rates for the third consecutive time

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Repo and Reverse Repo

Mains level : Monetary policy decisions

  • The RBI has reduced the repo rate by 25 basis points (bps) to 5.75 per cent in the second bi-monthly monetary policy meet of the financial year 2019-20 (FY20).
  • It was a third straight interest rate cut by the RBI’s monetary policy committee (MPC).

What is Repo Rate?

  • REPO denotes Re Purchase Option – the rate by which RBI gives loans to other banks.
  • In other words, it is the rate at which banks buy back the securities they keep with the RBI at a later period.
  • Bank gives loan to the public at a higher rate, often 1% higher than REPO rate, at a rate known as Bank Rate.
  • RBI at times borrows from banks at a rate lower than REPO rate, and that rate is known as Reverse REPO rate.

Why has RBI cut repo rate

  • The RBI was widely expected to go for an interest rate cut amid dismal gross domestic product (GDP) growth, subdued investment and slowdown in consumption space.
  • Last week, government data showed GDP growth slowed to a five-year low of 5.8 per cent in the fourth quarter (Q4) of FY19.
  • Weak growth amid benign CPI inflation had created room for the Monetary Policy Committee to cut the repo rate by 50-75 bps through FY20E, beginning in June 2019.

Concern over the cut

  • The big concern is whether the transmission of the cut takes place adequately, in the sense of banks passing in the rate cut to customers.
  • This has not happened sufficiently in the case of the previous cuts.

Back2Basics

Monetary Policy Committee

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