RBI cuts repo rate to ensure low lending interest by banks

Ensuring that the economic fundamentals are strong, the Reserve Bank of India on Tuesday cut the repo rate by 25 basis points. This signifies that the prices of goods in the country are moderating and the industry and and the common man may borrow loans at less interest rates. The RBI Governor, Raghuram Rajan, who had said there would be monthly review of interest rates for lending by banks, at the first bi-monthly monetary policy review today reduced the repo rate to 6.50% from 6.75%, which was the first such reduction since September last. Repo rate is the rate at which the commercial banks borrow from the RBI. With the latest reduction, the focus is on how soon the commercial banks pass on the benefits to borrowers. Last financial year, the RBI reduced the repo rate by 125 basis points, but the commercial banks passed off only half of the benefit they enjoyed from the RBI. Inflation is down from 5.7% in January to 5.2% in February. But the other economic indicators are not rosy. The Seventh Pay Commission award is going to impact on the economy. Also the low reservoir levels and the next monsoon will have an impact on the economy.