RBI cuts repo rate by 50 basis points to 5.5 pc, changes policy stance to neutral
Mumbai: RBI Governor Sanjay Malhotra on Friday announced a jumbo 50 basis points cut in the repo rate from 6 per cent to 5.5 per cent to spur growth in the economy, as inflation has come down below the lower RBI band of 4 per cent.
The RBI Governor also announced a 100 basis points CRR cut, effective in four equal tranches of 25 basis points starting from September 6, October 4, November 1 and November 29. The step is expected to inject Rs 2.5 lakh crore into the banking system, boosting liquidity and supporting credit flow.
A lower policy rate leads to a decline in interest rate on bank loans which makes borrowing easier for consumers as well as businesses resulting in higher consumption and investments in the economy leading to higher growth.
However, the effectiveness of this rate cut will largely hinge on how quickly and efficiently commercial banks pass on the benefits to borrowers.
The RBI Governor said the repo rate has now been reduced 100 basis points in quick succession since February this year and hence, the monetary policy stance has been changed from accommodative to neutral.
This will enable the RBI to keep a close watch on the overall growth-inflation dynamics.
The RBI Governor informed the inflation rate has now declined to 3.2 per cent amid a broad-based moderation of prices, and there is a durable alignment of the inflation with the RBI’s band.
Accordingly, the RBI has also reduced its projection for the inflation rate from 4 per cent to 3.7 per cent.
Malhotra said that India was still the fastest-growing economy. The balance sheets of corporates, banks and the government were strong and the external sector was stable which reflected the robust fundamentals of the economy. The Indian economy offered attractive opportunities for both domestic and foreign investors, he added.
The uncertainties regarding rabi crops have abated considerably and the second advance estimates point to a record wheat production and higher production of key pulses over that last year. Robust kharif arrivals, are also expected to set the stage for a durable softening of food inflation.
According to the RBI, the sharp decline in inflation expectations would also help anchor inflation expectations, going ahead. Furthermore, the fall in crude oil prices augurs well for the inflation outlook.
The Governor said that the Indian economy offers immense opportunities to investors on the back of demography, digitalisation, and domestic demand.