The Reserve Bank of India (RBI) cut its key policy rate, the repo rate — the rate at which it lends to banks — by 25 basis points to a five-year low of 6.50 per cent while indicating a further cut in the offing.

• RBI Governor Raghuram Rajan said that ensuring that current and past policy rate cuts transmit to lower lending rates was more important. What he implied was that despite the central bank lowering rates by 125 basis points since 2015, banks have reduced rates only by close to 60 basis points.
• The RBI appears keen to ensure that the benefits of a rate cut translates into lower borrowing costs for firms and individuals and also assess the prospects of the monsoon before committing to an aggressive cut in rates.
• Rajan also took a host of measures on the liquidity front, starting with the narrowing of the policy rate corridor to 0.50% from the earlier 1 percentage point, which resulted in the reverse repo rate – at which banks can park excess funds with the RBI – being reset at 6%.
• RBI also retained its GDP growth forecast at 7.6%, on the assumption of a normal monsoon and a boost to consumption through the implementation of the Seventh Pay panel recommendations.
• The central bank said it expects the implementation to hurt inflation by 1-1.5% over a two year period, but added that the shock will not be as strong as that felt during the implementation of the sixth pay panel suggestions.
• Rajan welcomed the government move to amend the RBI Act to create a monetary policy committee, saying it will further strengthen the policy’s credibility.

Policy Rates

Reserve Ratios