The Reserve Bank of India (RBI) made a surprise announcement on June 6, as Governor Sanjay Malhotra revealed the Monetary Policy Committee’s (MPC) decision to reduce the repo rate by 50 basis points (bps) to 5.5%. This move is expected to provide relief to loan borrowers across the country. Along with the rate cut, the MPC also changed its policy stance from “accommodative” to “neutral”, indicating a shift in the central bank’s approach to monetary policy.
The reduction in the repo rate will lead to a decrease in the cost of borrowing for commercial banks, which is expected to be passed on to consumers in the form of lower interest rates on loans. However, the RBI Governor emphasized the need for banks to speed up the transmission of these rate cuts to borrowers. Currently, it takes banks around 6-9 months to pass on the benefits of rate cuts to customers, which the Governor feels is too slow.
In addition to the repo rate cut, the RBI also announced a change in the cash reserve ratio (CRR) by 1 percentage point. The CRR is the proportion of deposits that commercial banks are required to hold with the RBI, rather than lending out to customers. By reducing the CRR, the RBI is aiming to increase the amount of liquidity in the banking system, which should also contribute to lower interest rates and increased borrowing.
The RBI’s decision to cut the repo rate and change its policy stance is seen as a positive move for the economy, as it is expected to boost borrowing and spending. With the reduction in interest rates, borrowers can expect to pay less on their loans, which should increase demand for credit and stimulate economic growth. The RBI’s emphasis on faster rate transmission also highlights the need for commercial banks to respond quickly to changes in monetary policy, in order to ensure that the benefits of rate cuts are passed on to customers in a timely manner. Overall, the RBI’s announcement is a welcome move for loan borrowers and is expected to have a positive impact on the economy.