In its third rate cut since February the Reserve Bank of India today lowered the key repo rate by 25 basis points to 5.75%. This brings the repo rate – the key interest rate at which RBI lends to the banks – to the lowest it has been since July 2010.
What bears underlining is that the RBI decision is taken in light of data showing the economy growing at its slowest in over four years. The 5.8% growth in the last quarter is really inadequate to generate jobs for the millions of young Indians entering the labour market each month. So the goal here is to improve the liquidity supply, which would in turn help revive consumer demand and manufacturing activity.
But the previous two rate cuts have not really seen the cost of funds for borrowers coming down to expectation. What is now needed is a much stronger transmission to interest rates in the economy. While the impact of monetary policy is felt with some lag everywhere, in India the situation is made significantly worse by the ongoing crisis in both the banks and NBFCs. NPAs and solvency issues need fixing for credit to really start flowing again.
Read full story: Loans may become cheaper as RBI cuts repo rate for third time in a row