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Four reasons why RBI cut repo rate to lowest in 4 years

Four reasons why RBI cut repo rate to lowest in 4 years

Raghuram Rajan said, "RBI stance will continue to be accomodative but at the same time vigilant. Policy growth has to be steady and predicatable."

(Source: Reuters) (Source: Reuters)

The Reserve Bank of India (RBI) cut the repo rate by 50 basis points in its fourth bi-monthly policy review held on Tuesday.

Repo rate, currently at 7.25 per cent has been cut to 6.75, the lowest in four years. It is the rate at which RBI lends short-term funds to commercial banks.

Cash reserve ratio (CRR) has been kept unchanged at 4 per cent. It is the money commercial banks must keep with RBI.

RBI so far this year has cut the interest rates by 75 basis points. This is the fourth rate cut by the apex bank.

The reverse repo rate has fallen to 5.75 per cent.

Raghuram Rajan said, "RBI stance will continue to be accomodative but at the same time vigilant. Policy growth has to be steady and predicatable."

The apex bank cut the FY16 GDP growth target to 7.4 per cent from 7.6 per cent while projecting retail inflation at 5.8 per cent for January.

"Focus should now shift to bringing inflation dwn to 5% by FY 17 end," he said.

Factors that affected RBI's decision:

  • Retail inflation dropped to a record low of 3.66 per cent in August. Plummeting global oil prices analysts say, restrained the inflation. RBI Governor Raghuram Rajan had said that much depends on the monsoon, which could play a spoilsport.
  • Finance Minister Arun Jaitley has been pressing for a rate cut as the economy is growing below the targeted 8-8.5 per cent for the year ending March.
  • The GDP however slowed to 7 per cent in the June quarter as compared to the 7.5 per cent in the March quarter.
  • US Federal Reserve kept the interest rates unchanged.