RBI cuts rate by 25 bps

The Reserve Bank of India (RBI) has cut its key lending—the repo rate—by 25 basis points to 6.25 percent, as a newly set up panel felt that inflation levels were low enough to reduce loan rates. The decision of the monetary policy committee (MPC), headed by new RBI governor Urjit Patel, will likely cheer business leaders and households as cheaper loans will aid investment and spending. The six member panel, which brainstormed over two days, unanimously agreed that inflation was unlikely to gallop past the tolerance threshold of 6 percent in the near future. The MPC expects retail inflation rates to hover around 5 percent by March 2017, which is well within the comfort zone. A lower repo rate—the rate at which banks borrow from RBI--would mean households may expect cheaper bank loans to buy houses and goods such as cars, which peak during the festival shopping season in October and November.
Since January 2015, the RBI has cut the repo rate six times. India’s retail inflation has touched a five-month low of 5.05 percent in August, triggering hopes of a rate cut. The drop in overall inflation rates has been primarily aided by continuous drop inflation in food inflation. India’s economy grew 7.1% during April to June, the slowest in 6 quarters, but the RBI and the MPC expect a revival in the coming months boosted by good rains, a pay bonanza for government employees and festive season buying. The RBI retained its earlier  growth projection of 7.6 percent for 2016-17. Besides, banks appear to be awash with funds and well equipped to deal with rise in loan growth demand to aid new investments. The spurt in demand could, however, potential push inflation. The RBI and the government have set a retail inflation target of 4 per cent for the next five years with an upper tolerance level of 6 percent and lower limit of 2 per cent.