The Reserve Bank of India (RBI) has reduced the key policy rate or the repo rate by 25 Basis Points (bps) to 6% in its third monetary policy review on Wednesday, as retail inflation softened. This is the second rate cut by the Monetary Policy Committee (MPC) since its inception in October.
The Monetary Policy Committee (MPC) headed by RBI Governor, Urjit Patel was earlier expected to take crucial measures related to policy and finances. RBI’s move is seen on the back of inflation running well below its target for consecutive quarters. Inflation fell below the 4 per cent mid-target of the RBI due to weak consumer spending and consumer inflation too has been recorded at its slowest pace, at 1.5 per cent. Industrial production also witnessed a slow output.
Chief Economic Advisor had earlier hinted about a rate cut on the cards, saying there was a paradigm shift in the inflation that was missed by all. Economists believe numerous global factors will also contribute to the RBI’s decision to go for a rate cut. The US Federal Reserve, which is expected to shrink its balance sheet in the coming weeks to boost growth after discussions in the Euro zone, will make it difficult for the RBI to introduce rate cuts.
Earlier in the day, the rupee edged down by 5 paise to 64.12 against the dollar as the latter found buying traction among importers ahead of RBI policy decision. However, an important thing to see would be e that whether these cuts in the interest rate help in making loans little cheaper.