Monetary Policy Review: RBI Plays Safe With 25 bps Reduction

Reserve Bank of India on Wednesday reduced Repo Rate and Reverse Repo Rate in its 3^rd Policy meet. The Monetary Policy Committee forecasted the growth rate to be 7.3% for the Financial Year 2018. More details mentioned below.

Reduction in Repo Rate after a long Halt

The RBI reduced the repo rate by 25 base points after 10 long months. The present rate is down to 6% which is a sign of relief for the banks. Economic experts were expecting a slight reduction in repo rate since the last policy meet. The rate was approved by 4-2 in the six member committee. Four members including RBI governor Urjit Patel voted in favor of reducing repo rate by 25 bps (Base Points) while the two members wanted to reduce it by 50 base points. The MPC also reduced reverse repo rate by 25 bps cutting it down to 5.75%.

RBI also forecasted the growth rate to be 7.3% for the financial year 2018. Patel claimed that reduce in repo rate was much needed as the inflation is at record low. The other reason was the fall in manufacturing rate to 47.9% from 50.3 of last month was another reason to do so. Last year’s demonetization drive struck hard on manufacturing and the implementation of GST also slowed down manufacturing activity to a record low in last eight years.

Implications of Reduction in Repo Rate

The reduced repo rate will push the banks to reduce interest rates on home loans, giving a boost to infra sector. The manufacturing that was struggling will get enormous benefit from this step as loans will be cheap helping the manufacturing industry to invest more. As usual, it will help the startups in getting cheap loans encouraging more business and jobs in country.

The infrastructure industry desperately needs the help from the government and this step may help them in some way. Modi government has stressed on infrastructure and startups since the starting while it still has to work on balance sheets of the banks. The priority of both the RBI and government will be on boosting growth, manufacturing, startups and infrastructures while gradually dealing up with the bad loans of the banks.