Explained: Reasons, implications of repo rate cut

  1. The Reserve Bank of India’s(RBI) monetary policy committee (MPC) has lowered the repo rate by 35 basis points to 5.4%.
  2. Repo stands for ‘Repurchasing Option’.It refers to the rate at which commercial banks borrow money from the RBI.
  3. The Monetary Policy Committee(MPC) is a committee of the Reserve Bank of India.The MPC is made up of six members with three nominated by the Union government and three representing the RBI.
  4. The MPC is mandated by law to ensure that retail inflation stays within a band of two percentage points of the target inflation rate of 4%.Since inflation has been well below the 4% mark,the MPC members have voted for rate cut.
  5. The rate cut was also needed as government finances are at their limit and exports has also been lagging because of low global demand and trade tensions.Hence,the rate cut is expected to boost consumption and investment in the economy.
  6. However,the MPC has cut the repo rate by 110 bps since February,2019 but only about 40 bps have been transmitted to borrowers.The poor monetary transmission by banks has consistently undermined the effectiveness of the MPC’s decision.
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