Reserve Bank of India has cut Repo Rate for third time in a row in this year. RBI has lowered the Repo Rate by 25 point basis from 7.5% to 7.25%. But CRR (Cash Reserve Ratio) remains unchanged at 4%. It was little bit expected that RBI would bring down the rate of interest by lowering the bank rate or repo rate. Rate of interest in various loans is going to be reduced now. RBI has given the notice to take this decision in immediate effect to the all scheduled banks in India.
What is Repo Rate
Repo rate is nothing but, at which rate Reserve Banks lend money to all the scheduled commercial banks. Generally it is taken as long term basis from RBI. If RBI lowers the repo rate, rate of interest offer by the commercial banks will also come down. Repo rate is directly proportional to the actual rate of interest we get from the scheduled banks.
RBI’s Decision & India’s Growth
Reserve Bank of India has taken a brave step to push cash flow into the economy. In last quarter India showed a extraordinary performance and touched 7.5% growth by beating China’s 7%! RBI thinks it is the high time to attract investment and lending. That’s why RBI lowered repo rate that has direct effect on interest rate. To accelerate the growth, it is needed. Industry will need more loans for expanding their business and factories. RBI’s decision will support their growth curve. Industries will consume more loans and will go for more expansion if they get loan at low interest rate. New expansion brings more employments thus pushes the overall standard of life of a country. According to the FICCI, RBI has taken the right decision at right time.
RBI’s Decision & Possible Affects
Some negative impacts are always there in backdoor of any brave decision. In this case it is the “Inflation”. If a bunch of cash flows through the economy, there is chance of price rise in every sectors, thus triggers “Inflation”. But RBI assured that they have been watching the indicators strongly and they will not let it happen.
RBI’s Decision, Inflation & Monsoon
Reserve Bank of India decided to move on with lowering the repo rate so that it can meet the cash demand in the growing economy. But this year, India has received less seasonal rains because of the weak monsoon. Food prices will increase if this lasts few more days. In this circumstances, more cash flow may cause food inflation at any point of time and can trigger a serious crisis nationwide.
Though RBI directed all the scheduled bank to follow the orders, experts expect that RBI will wait a while for more data to be sure that food inflation is not going to be occurred.
In a press statement before Rughurajan declared repo rate cut officially RBI (Reserve Bank of India) said,
[quote_box_center]”With low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today” [/quote_box_center]