RBI policy review: Monetary Policy Committee announces third repo rate-cut in as many reviews, sets benchmark at 5.75% and shifts stance to 'accommodative'

Following its pro-growth trend, Reserve Bank of India (RBI), on Thursday, has cut its repo rate for a third time lowering its lending rate by 25 basis points to 5.75% from 6.0% under liquidity justment facility (LAF). This meant reverse-repo rate under LAF was automatically justed to 5.50 %,  marginal standing facility (MSF) rate and Bank Rate to 6.0%.

Before analysing what were factors driving this decision, here's what it means:

What is Repo rate and how does it affect us?

Repo rate is rate at which RBI lends money to commercial banks in event of any shortfall of funds, this is done to tackle and control inflation. This decision would slash down interest rates which could be good news for debt-ridden companies. For real estate fall in interest rates could mean lower EMIs as banks would be receiving funds at a lower interest rate.

What is reverse repo rate?

Reverse repo rate is rate at which RBI borrows money from commercial banks within country to control cash flow in market.

RBI Lowers Ecomic Growth Forecast To 7 Per Cent For FY20

above decision was taken to control consumer price index (CPI) inflation and keep it in medium-term target zone of 4% within a band of +/- 2 % while pushing for growth in ecomy, as written in  Second Bi-monthly Monetary Policy Statement released by RBI.

Talking about current market situation with respect to Repo rate, RBI stated in its assessment that while initial April-May period saw a deficit due to restrained government spending, June saw a boost in liquidity. Detailing its operations in monetary policy, RBI explained swing in repo rates due to market conditions.

"Liquidity in system turned into an aver daily surplus of ₹66,000 crore (₹660 billion) in early June after remaining in deficit during April and most of May due to restrained government spending. weighted aver call money rate (WACR) – operating target of monetary policy – remained broly aligned with policy repo rate: it tred above policy repo rate (on an aver) by 6 bps in April, but below policy repo rate by 6 bps in May," re statement.

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Speaking about previous reduction in repo rates done in February and April, RBI stated that weighted aver call money rate (WALR) reflected near full transmission of reduction in policy rate.

"Transmission of cumulative reduction of 50 bps in policy repo rate in February and April 2019 was 21 bps to weighted aver lending rate (WALR) on fresh rupee loans. However, WALR on outstanding rupee loans increased by 4 bps as past loans continue to be priced at high rates. Interest rates on longer ter money market instruments remained broly aligned with overnight WACR, reflecting near full transmission of reduction in policy rate," re statement