Economy to boom as RBI cuts repo rate by 50 bps to 6.75%

In a much surprise to everyone, the Reserve Bank of India Governor Raghuram Rajan has cut down the repo rate by a huge 50 basis points (bps) to 6.75%. Rajan also reduced the reverse repo rate to 5.75%. While, the cash reserve ratio (CRR) remain unchanged at 4%.

In an immediate reaction, the market has rocketed up. Soon after the surprise rate cut, Sensex rose over 350 points. Though the market sustained later, the Sensex ends 161.82 points higher to 25778.66 and the Nifty climbed 47.60 points to 7843.30 at the market closure.

RBI Rate Cuts

The RBI Chief, who was under pressure from the finance ministry to cut the interest rate, has stunned every one by the four year low reduction by 50 bps, where expectations were for a 25 bps cut. From now on the EMI’s can be expected to come down as Rajan has announced to remove the hurdles for banks in passing the rate cuts.

India’s largest lender, State Bank of India has been motivated by the RBI repo rate cut and has cut base rate by 40 bps to 9.3%. This is the lowest lending rate in the country, but sooner we can expect more banks to cut their base rate.

Earlier, the surprising announcement came from the RBI Chief in the fourth bimonthly review of the monetary policy in the current fiscal. The apex bank of India has already eased the policy rate by 75 bps so far this year.

Raghuram Rajan said the conditions are met for the accommodations, adding that the January 2016 target of 6% inflation is likely to be achieved. RBI’s focus is to bringing the inflation to around 5% by the end of fiscal 2016-17. According to the data revealed in August, the consumer inflation is recorded low at 3.66%. In a bid to boom the housing sector, the RBI Chief has proposed to reduce the risk weights on affordable housing. Presently the minimum risk weight applicable on individual housing loans is 50%.

RBI has laid down the statement that it will continue to go accommodative also pinching for further rate cuts to follow. The apex bank also stated that the 7th pay commission will posses further enactments to foster domestic demand, adding that it’s convinced by the government’s sincerity in maintaining the fiscal deficit and quality.

At last, the apex bank RBI and the government has reached harmony. By the reverse repo rate cut RBI has poked the banks to not just sit on the money, but to lend more. By the rate cut, RBI has done their part and it’s up to the government and corporate sector to undergo reforms to gain the benefits.

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