Monetary Policy Decisions – RBI Reduces in Repo Rate

Reserve Bank of India (RBI)
Reserve Bank of India (RBI)

In its Monetary Policy Review, the Reserve Bank of India (RBI) had reduced the benchmark Repo rate to aid the growth of the economy.

In Detail :-

  • For the second time in a row, the RBI’s Monetary Policy Committee (MPC) has reduced the repo rate.
  • It has reduced the rate by 25 basis points.
  • It now stands at 6%.
  • The RBI has cited concerns over the growth of the economy to reduce the repo rate.

Repo Rate :

  • RBI lends money to commercial banks at this rate.
  • When this rate is lowered, the cost of getting money by commercial banks will become cheap and ease liquidity pressures.
  • During high inflation periods, the repo rate is increased so that excess liquidity is sucked out of the economy to ease inflationary pressures.

The Impact :

  • With the RBI’s decision, interest rates for loans to home, vehicle, and retail will be lowered.
  • This enables private investment in the economy and spur growth.

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Monetary Policy Committee :

  • The MPC of RBI consists of six members and it is the apex body to fix benchmark interest rates in the country.
  • MPC meetings are held 4 times a year.
  • Among the six members, three are officials nominated by the government and three are RBI officials.
  • The Governor of the RBI is the ex-officio chairman of the committee.
  • Decisions are taken with a majority vote and RBI Governor has a casting vote.
  • The main aim of the MPC is to keep inflation in check.
  • As per the Gazette notification of India extraordinary dated 5th August 2016, the inflation target for the MPC is 4% by March 31, 2021, with lower and upper tolerance levels of 2% and 6%.

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Other Decision MPC :

  • It has lowered the growth forecast for the current financial year to 7.2% from 7.4%.
  • For the first half of the current financial year, the committee has lowered the inflation forecast to 2.9%-3% from 3.2%-3.4%.
  • It also stated that the domestic GDP will slide due to sluggish rural and urban demand.

Conclusion :

  • The reduction of repo rate comes at the right time for the economy where lower GDP projections are causing worry.
  • Hope the private players will utilize lower interest rates and invest in productive activities that will boost the economy and generate employment.
  • India cannot afford to slow down at this crucial juncture.
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