Mumbai Mumbai, RBI Governor Sanjay Malhotra on Friday announced a massive cut in the repo rate by 50 basis points to boost growth in the economy so that inflation has come down below the RBI’s lower band of 4 per cent. Lowering the policy rate reduces the interest rate on bank loans, making it easier for consumers and businesses to borrow, resulting in more consumption and investment in the economy, leading to higher growth.
However, the effectiveness of this rate cut will largely depend on how quickly and efficiently commercial banks pass on the benefits to borrowers. The RBI Governor said that the repo rate has been cut by 100 basis points continuously since February this year and, therefore, the monetary policy stance has been changed from accommodative to neutral. This will enable the RBI to keep a close watch on the overall growth-inflation dynamics.
The RBI Governor pointed out that the inflation rate has now come down to 3.2 per cent amid broad-based softening of prices and there is a sustainable alignment of inflation with the RBI’s band. Accordingly, the RBI has lowered its forecast for the inflation rate to 3.7 per cent from 4 per cent. Malhotra said India is still the fastest growing economy. The balance sheets of corporates, banks and the government are strong and the external sector is stable which reflects the strong fundamentals of the economy. He said the Indian economy offers attractive opportunities for both domestic and foreign investors. Uncertainties about rabi crops have largely reduced and the second advance estimates point to record wheat production and higher production of major pulses compared to last year. Strong kharif arrivals are also expected to lead to a lasting softening of food inflation. According to the RBI, the sharp decline in inflation expectations will also help stabilize inflation expectations going forward. Moreover, the decline in crude oil prices bodes well for the inflation outlook. The RBI governor also announced a 100 basis point cut in CRR, effective in 4 equal instalments of 25 basis points each from September 6, October 4, November 1 and November 29. The governor said that the Indian economy, driven by demographics, digitalisation and domestic demand, offers immense opportunities to investors.
