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Repo Rate cut
Why is it in the news?
- The Monetary Policy Committee (MPC), in its first meeting in FY’20, cut the key lending rate repo rate by 25 basis points from 6.25% to 6%.
- It, however, kept the monetary policy stance at ‘neutral’.
More in the news
- The RBI has projected a GDP growth of 7.2 per cent for 2019-20.
- In the last MPC meeting in February, the committee had cut repo rate by 25 basis points from 6.50% to 6.25%.
- In the last review in February, the MPC shifted its stance to ‘neutral’ from ‘calibrated tightening’.
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.
Analysis:
- Though retail inflation rose to a four-month high of 2.57% in February, it is still below the RBI’s medium-term target of 4%.
- Despite the rate cut, the response from banks, in cutting lending rates, has only been partial.
- In last rate cut, only a few banks reduced their marginal cost of funds based lending rate (MCLR).
- MCLR is the benchmark lending rate to which all the loans are linked by 10-15 bps.
- Bankers justify not passing on rate changes to end customers on two grounds:(1) Their cost of deposits has not fallen with a cut in the repo rate.(2) Monetary transmission comes with a lag. So, even if the RBI cuts lending rates, it is unlikely that banks will pass on the entire benefit to the customers.
Source
The Hindu.