Login With Google
Repo rate cut
Why is it in the news?
- The Reserve Bank of India reduced the key policy rate, the repo rate, by 35 basis points (bps) to 5.4%.
- This is the fourth consecutive interest rate cut this year, taking the benchmark lending rate to a nine-year low.
More in the news
- The rate cut is aimed at tackling the pervasive slowdown.
- Many sectors like automobiles are facing a slump in demand.
- There has been a distinct slowdown in the economy and the problem has been compounded by the tight liquidity situation in NBFCs, housing finance companies (HFCs) and the reluctance of banks to lend.
Revised growth forecast:
- RBI revised the growth forecast to 6.9% for FY20, from 7% predicted during the June policy.
- Consumer price index based inflation is projected slightly higher at 3.5-3.7% for the second half of the current financial year and 3.6% for the first quarter of next fiscal.
- With the GDP growth forecast for the year pared to 6.9%, the policy stance was kept accommodative.
Repo Rate:
- Repo rate is the rate at which the central bank of a country (RBI) lends money to commercial banks in the event of any shortfall of funds.
- Repo rate is used by monetary authorities to control inflation.
- In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank.
- This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
- The central bank takes the contrary position in the event of a fall in inflationary pressures.
- Repo and reverse repo rates form a part of the liquidity adjustment facility.
Source
The Hindu.