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THE NEWS

To revive consumer demand and boost the growth engine, RBI has slashed repo rate by 25 bps to 5.75 percent.

MORE ON THE NEWS:

  • In the recently held RBI’s Monetary Policy Committee (MPC) meet, the Committee reduced the key repo rate by 25 bps to 5.75 percent from 6.0 percent.
  • The Reverse Repo Rate under Liquidity Adjustment Facility (LAF) has been adjusted to 5.50 percent and the Marginal Standing Facility (MSF) Rate and the bank rate to 6.0 percent.
  • It was the third time when the rate has been reduced in 2019.
  • The Government Bonds has dropped 9 bps to close at 6.93 percent, and equity indices settled in the negative territory.
  • The Consumer Price Index based Inflation has reduced from 3.7 percent to 3.4 percent in the 2nd half of the current fiscal.
  • RBI has also changed its stance from “Neutral” to “Accommodative”. As per RBI, there is a scope to accommodate growth concerns and reinvigorate private investment activity as the recent RBI data reflects declining trends in the past three decades.
  • According to RBI, these rate cuts are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/-2 percent, while supporting growth.
  • In order to achieve harmony with Basel III norms, the committee has decided that the minimum LR should be 4 percent for Domestically Systemically Important Banks (DSIBs) and 3.5 percent for other banks.

THE KEY PROJECTIONS:

  • RBI has revised its GDP growth Projections for the current financial year from 7.2 percent to 7 percent.
  • The headline inflation trajectory remains below the target despite the past two rate cuts.
  • RBI targets to achieve 4 percent CPI Inflation over the medium term.

OTHER INITIATIVES:

  • To boost the digital transactions the banking regulator has decided to waive off the charges for fund transfer by Real Time Gross Settlement System (RTGS), meant for large-value transactions and National Electronic Fund Transfer (NEFT) for all other fund transfers.
  • A review committee has been formed to review the charges in transactions in ATMs, which will submit its report in two months of its first meeting.

IMPACT OF RECENT POLICY INITIATIVES:

  • Cheaper Borrowings: The move by the RBI makes it cheaper for commercial banks to borrow short-term funds from the RBI.
  • Cheaper Loans: Commercial banks will have more room to pass on the benefit of lower lending rates to loan borrowers.
  • Low EMIs: The equated monthly installments (EMIs) that borrowers pay on home, car, personal and other categories of loans are set to come down in the near term.
  • Low interest on Deposit Schemes: At the same time, the interest rate earned by customers in fixed deposit (FD) and other term deposit schemes will also come down as the commercial banks will have to maintain the spread between the interest rate at which it lends to public and at which it borrows from RBI and pays interest on those deposits.
  • Lending Growth: A rate cut will boost lending growth as well as consumer and investor sentiment as India heads to the polls.

KEY-BANK TERMS:

  • Repo Rate: It is the rate at which the Reserve Bank of India lends money to commercial banks in the event of any shortfall of funds. The rate is used to control inflation.
  • Reverse Repo Rate: Reverse repo rate is the rate at which the central bank borrows money from commercial banks within the country. This is a monetary policy instrument through which the money supply can be controlled in the country.
  • Bank Rate: It is the rate charged by the central bank i.e., Reserve Bank of India for lending funds to commercial banks. This rate influences lending rates of commercial banks.
  • Cash Reserve Ratio (CRR): CRR is a certain percentage of the total bank deposits which has to be kept in the current account with the central bank, which means that commercial banks do not have access to that amount for any economic activity or commercial activity. This amount cannot lend to anyone.
  • Bulk Deposits: In 2013, RBI defined Bulk Deposits as Rupee term deposits include domestic term deposits as well as term deposits under Non-resident ordinary (NRO) and Non-resident External deposit (NRE) accounts. Now, it has redefined as-as single rupee deposits of Rs 2 crore and above.

CONCLUSION:

This move by the RBI has adopted a very sensible and pragmatic approach. The RBI took cognizance of the potential or likelihood for inflationary pressures emerging from food prices and fuel prices, and also fiscal pressures from the large government borrowing program. RBI’s intent of supporting economic growth, with inflation under control, is evident. It will increase the purchasing power of people and boost industrial production due to increased demand for goods which will ultimately boost the economic growth of the country.

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