RBI cuts repo rate by 25 bps

Hello and welcome to ExamPundit. Reserve Bank Governor Raghuram Rajan on Wednesday announced a surprise repo rate cut, his second in less than two months. Repo rate has been reduced by 25 basis points or 0.25 per cent to 7.5 per cent with immediate effect.



The RBI had lowered interest rates by 25 bps on Jan 15. Both rate cuts this year were outside of the central bank’s scheduled policy review meetings.


The RBI has, however, kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4 per cent of net demand and time liabilities (NDTL). It has said that it will continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under seven-day and 14-day term repos of up to 0.75 per cent.



It has also decided to continue with daily variable rate repos and reverse repos to smooth liquidity. Consequently, the reverse repo rate under the LAF stands adjusted to 6.5 per cent, and the marginal standing facility (MSF) rate and the bank rate to 8.5 per cent.


The repo rate cut comes days after Finance Minister Arun Jaitley’s Union Budget announcement. In his Budget, Mr Jaitley had loosened the reins on public spending to drive growth, but promised lower-than-expected borrowing despite raising the fiscal deficit target.


Mr Jaitley’s balancing act seems to have gone down well with Dr Rajan. In a statement, he said, “The fiscal consolidation programme, while delayed, may compensate in quality, especially if state governments are cooperative.”

The RBI said the CPI inflation at 5.1% in January was well within its target of 8%, adding that disinflation was evolving at a faster pace than envisaged.


Further monetary actions will be conditioned by incoming data, especially on the easing of supply constraints, improved availability of key inputs such as power, land, minerals and infrastructure, continuing progress on fiscal consolidation, the pass through of past rate cuts into lending rates, the monsoon outturn and developments in the international environment, it said.



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This post was last modified on November 27, 2017 9:03 am