To warm up the domestic economy in view of rising uncertainties in a global perspective, the Reserve Bank of India (RBI) on August 2 cut its benchmark repo rate by 25 basis points to 6 per cent. The move is the second cut by the bank this calendar year after it had lowered the rate by 25 basis points to 6.25 per cent in February.
Speaking to reporters after the meeting of the Monetary Policy Committee (MPC), Sanjay Malhotra, governor, RBI, said the committee was unanimous in voting for the rate cut because of low inflation and emerging global headwinds that warrant the adoption of an accommodative stance.
Lowering the repo rate will translate into lower rates for loans offered by commercial banks, thereby helping borrowers with lower EMIs on home loans and other retail loans. This move is all very timely, as consumer sentiment is gradually improving, and demand in the urban sector is showing early signs of recovery.
What is the Repo Rate and Why Is It Important?
The repo rate is the interest rate at which the RBI lends money to commercial banks. As the central bank brings this rate down, banksborrowing becomes cheaper, and banks are expected to extend this benefit to consumers by lowering lending rates. Higher consumer spending resulting from lower EMIs contributes to economic spiritedness.
This proactive measure by the RBI comes against a backdrop filled with recent trade tensions, which have caused fresh concern globally. Under President Donald Trump, the U.S. administration imposed reciprocal tariffs on Indian exports, igniting fears about the potential wreckage trade wars might bring to the global and domestic growth story.
Higher Global Trade Tensions Force Caution
Said Governor Malhotra, “The new agrarian year has commenced with anxious prospects. Darkness has descended in terms of trade conflicts and their consequences for the Indian economic outlook.” “The dent in global growth due to trade tensions will impede domestic growth. Higher tariffs may impact our net exports,” he said.
While maintaining an accurate global fallout index at this time is challenging, he highlighted the importance of maintaining a vigilant watch, adding, “India is proactively engaging with the US administration to address trade issues.”
Despite facing numerous global challenges, the RBI remains optimistic about the domestic outlook. In the sectors of agriculture, an apprehension of a normal monsoon appears to be favourable. Manufacturing activities are gaining traction following a period of slowdown, and the services sector continues to be resilient, with optimistic data on urban discretionary spending.
Inflation is under control.
Low inflation has been one of the key facilitators for lowering rates. The RBI governor stated that it is now below the central bank’s medium-term target of 4 per cent. A significant part played by the reduction in food prices maintains inflation near the comfortable level, thereby giving room to the RBI in manoeuvring policy rates.
Slight revision in the growth forecast
However, the central bank has made a minor downward revision to its GDP growth estimate for the current financial year. The 20 basis points reduction in the real GDP growth forecast pegs it now at 6.5 per cent. The revision stems from an attitude of prudence in recognising the external salt-on-vulnerabilities and slower-than-expected recovery from some sectors.
Malhotra concluded by reiterating the position of the RBI on growth while controlling inflation. “We are closely monitoring both global and domestic developments.” The Indian economy is well calibrated; however, we remain cautious to ensure sustainable growth,” he remarked.
Thus, the move is bound to bring some expectations of lowering interest rates for home loans in a few weeks as banks readjust their lending rates according to the new repo rate, which will provide consumers with much-needed relief. Source NDTV
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