Blitz Bureau
NEW DELHI: RBI Governor Sanjay Malhotra announced on August 6 that the monetary policy committee has decided to keep the repo rate unchanged at 5.5 per cent, while sticking to the “neutral” monetary policy stance. He said the decision was taken unanimously by the MPC after a detailed assessment of the macroeconomic situation and the growth-inflation dynamics. A neutral stance requires neither stimulation nor curbs on liquidity as it strikes a fine balance between controlling inflation without hurting growth.
The RBI Governor said that inflation had come down to much lower levels there was still some volatility in food prices, especially vegetables. However, core inflation had remained steady at around 4 per cent. He also said that the good monsoon and the upcoming festive season were expected to spur economic activity.
Malhotra said that the Indian economy was expected to post robust growth in the medium term amid the global trade uncertainty, backed by supportive policies of the Government and the RBI. He highlighted that the bright prospects for the Indian economy come amid the muted growth and an uptick in inflation in the world economy.
During its last monetary policy meeting in June 6, the RBI announced a 50 basis points cut in the repo rate from 6 per cent to 5.5 per cent and 100 basis point cut in the Cash Reserve to spur growth. The RBI Governor said the repo rate has now been reduced 100 basis points in quick succession since Feb this year and the transmission to the economy was still working out.
A lower policy rate and more liquidity with banks leads to a decline in interest rate on bank loans which makes borrowing easier for consumers as well as businesses resulting in more consumption and investments in the economy leading to higher growth.
However, the effectiveness of the rate cut hinges on how quickly and efficiently commercial banks pass on the benefits to borrowers.
