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Last updated: 07 Oct, 2019  

RBI.Thmb.jpg RBI rate cut

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Bikky Khosla | 07 Oct, 2019

The Reserve Bank of India (RBI) last week cut the short-term lending rate by 25 basis points to 5.15 percent in its fourth bi-monthly policy review. This is for the fifth time in a row the central bank cut the repo rate in an attempt to give a renewed push to the slowing economy. Now the repo rate is at its lowest level in nine years. The decision was taken unanimously by all the six members of the monetary policy committee (MPC), although one of them voted even for a steeper cut.

The RBI governor said that the central bank would "continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target". This comment sounds logical in the light of a sharp cut in growth forecast for 2019-20 from 6.9 percent to 6.1 percent, a huge downward revision of 80 basis points from the projection the central bank had made in its August policy meeting. Growth is at stake and without any doubt an accommodative monetary policy is the need of the time.

The central bank has also viewed that although the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum. It is noteworthy here that the RBI raised the lending cap for microfinance institutions to Rs 1.25 lakh from Rs 1 lakh. MFIs are playing a key role in empowering those in the bottom of the economic pyramid and the latest move will definitely help improve credit availability in rural and semi-urban areas.

Last month, the central bank made it mandatory (effective from October 1) for commercial banks to link loans to retail customers and micro, small and medium enterprises (MSMEs) to external interest rate benchmarks. The RBI has also mandated banks to reset interest rates under external benchmark at least once in three months. This is a welcome move. This will ensure that the benefits of the interest rate reduction are effectively transmitted to the consumers and also to the borrowers.

I invite your opinions.

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