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.