Explained: Why RBI has cut lending rates for the third consecutive timehttps://indianexpress.com/article/explained/explained-why-rbi-has-cut-lending-rates-for-the-third-consecutive-time-5768027/

Explained: Why RBI has cut lending rates for the third consecutive time

The big concern is whether the transmission of the cut takes place adequately, in the sense of banks passing in the rate cut to customers.

Explained: Why RBI has cut lending rates for the third consecutive time
The RBI headquarters in Mumbai on Wednesday. (Express Photo: Pradip Das)

The Reserve Bank of India’s rate-setting panel Thursday reduced the repo rate by 25 basis points (bps) to 5.75 per cent in the second bi-monthly monetary policy meet of the financial year 2019-20 (FY20), that concluded today. It was a third straight interest rate cut by the RBI’s monetary policy committee (MPC). The stance of the policy was changed to accommodative from neutral.

A cut in rates was on expected lines. The repo rate is the rate at which the RBI lends money to the commercial banks to tide over any shortfall of funds. After the cut, the reverse repo rate stands at 5.50 per cent.

Why has RBI cut repo rate

The RBI was widely expected to go for an interest rate cut amid dismal gross domestic product (GDP) growth, subdued investment and slowdown in consumption space.

Last week, government data showed GDP growth slowed to a five-year low of 5.8 per cent in the fourth quarter (Q4) of FY19. Weak growth amid benign CPI inflation had created room for the Monetary Policy Committee to cut the repo rate by 50-75 bps through FY20E, beginning in June 2019.

Concern over RBI’s repo rate cut

The big concern is whether the transmission of the cut takes place adequately, in the sense of banks passing in the rate cut to customers. This has not happened sufficiently in the case of the previous cuts.