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Explained: Why RBI’s decision to cut repo rate comes as a surprisehttps://indianexpress.com/article/explained/explained-why-the-rbis-decision-to-cut-repo-rate-comes-as-a-surprise-5573494/

Explained: Why RBI’s decision to cut repo rate comes as a surprise

The RBI's Monetary Policy Committee (MPC) has decided to cut its key policy rate — the repo rate — by 25 basis points from 6.5 per cent to 6.25 per cent with immediate effect. Here's what this means for you.

Explained: Why the RBI's decision to cut repo rate comes as a surprise
Reserve Bank of India Governor Shaktikanta Das interacts with the media at the RBI office in New Delhi. (Express Photo: Tashi Tobgyal)

The RBI’s Monetary Policy Committee (MPC) has decided to cut its key policy rate — the repo rate — by 25 basis points from 6.5 per cent to 6.25 per cent with immediate effect.

This is the first policy of new RBI Governor Shaktikanta Das, who also heads the MPC. The panel also decided to change the monetary policy stance from ‘calibrated tightening’ to ‘neutral’.

It was widely expected ahead of Thursday’s meeting that the MPC may not tinker with the policy rate but could restrict the changes to a shift in its stance to ‘neutral’ from ‘calibrated tightening’.

While headline inflation, led by food inflation has been benign, continuing high levels of core inflation — the non-food, non-fuel component of inflation — had led to the expectation that the RBI might stop short of cutting rates and restrict itself to a change in stance. The rate cut, therefore is a bit of a surprise.

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Explained: Why RBI's decision to cut repo rate comes as a surprise
Members of the Monetary Policy Review (MPC) at the RBI headquarters on Thursday. (Express Photo: Prashant Nadkar)

When the RBI cuts its benchmark lending rate, banks typically pass on the benefit to the customers. As and when the banks decide to pass on the rate cut, consumers could see home, auto and other loans getting cheaper.

Interestingly, while the decision to change the monetary policy stance was unanimous, on the repo rate cut, it was a 4-2 decision. Ravindra Dholakia, Pami Dua, Michael Patra and RBI governor Shaktikanta Das voted in favour of the decision. Chetan Ghate and Viral Acharya voted to keep the policy rate unchanged.