The Reserve Bank of India (RBI) cut the repo rates by 25 basis points for fifth time in a row in its bi-monthly monetary policy review on Friday. This is said to the lowest rate since April 2010.
This assumes significance in the backdrop of an imminent economic slowdown that reflects in the fall in consumption demand.
The Monetary Policy Committee has decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 5.15 per cent from 5.40 per cent with immediate effect.
Consequently, the reverse repo rate under the LAF stands reduced to 4.90 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40 per cent.
The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.
The MPC in its statement said that it has taken into consideration various external factors including the weakening global economic activity, fluctuations in the crude oil process and unsettled global financial markets among others.
On the domestic front, the factors that were taken into consideration were the- slump in Gross Domestic Product (GDP), low agricultural growth due to delays in the onset of the monsoon, weakened Industrial activity and service sector, retail food inflation among others.
Earlier, the RBI Governor has already indicated that benign inflation provides room for further easing of the monetary policy.
Given the prevailing festive season the impact of the monetary policy is expected to be seen earlier as the sales are expected to go up giving a fillip to the investment and boost consumption.
The Finance Ministry has announced a slew of measures like reduction in the Corporate tax rate, and reduction of GST on various goods. According to experts, these measures are expected to squeeze the fiscal space for the government.
The GST revenue collection has also been below the expected mark. Economists believe the Central Bank will ease the policy rates further to accelerate the growth.
In its third bi-monthly monetary policy statement, the MPC voted unanimously to reduce the policy repo rate and to maintain the accommodative stance of monetary policy.
The committee earlier said that the easing of the repo rate since February this year has had some impact and is expected to boost the economic activity.
Repo rate is the rate at which RBI lends to banks and reverse repo rate is the rate at which it borrows from the banks. The RBI regulates the liquidity situation in the country while aiming to maintain the inflation at the prescribed level.