Reserve Bank of India cuts Repo Rate by 25 basis points to 6%

Reserve Bank of India cut its Repo rate by 25 basis points from 6.25 to 6.00 as the inflation numbers continue to stay below the targets.

The rate cuts were expected by the industry experts, who were anticipating such a move from the Central Bank, as the bank changed its stance from neutral to accommodative at the beginning of the year. The retail inflation in the past few months has prompted the Central Bank to ease the policy.

Various factors have contributed for inflation falling short of the expected targets, as consumer expenditure has declined the last few months owing to the Modi-government’s decision to ban 500 and 1000 rupee notes. The declining oil prices have continued have added on to keep the inflation below the desired target.

The Reserve Bank of India also cut the Reverse Repo Rate – the rate at which central bank borrows money from commercial banks by 25 basis points to 5.75 percent.

The accommodative monetary policy may help trigger the economic activity gain some momentum but the persistent problem of loans in Indian Banks continues to persist. Non Performing Loans (NPLs) have continued to cripple the Indian Banking system, and banks have grown weary of lending despite the pace of economic activity.

The analysts predict that the Indian Economy will expand 7.3 percent to stay as the fastest growing economy in the world partly helped by the new and revamped sales tax regime. However, analysts also anticipate that the uniformity in the sales tax may trigger a rise in services prices which could in turn push up Core Inflation.

The move in services sector could push core inflation above 4 per cent which has long been a concern for RBI.