RBI cuts repo rate by 25 bps; EMIs to fall and loans to become cheaper

Mumbai (The Uttam Hindu) – Reserve Bank of India Governor Sanjay Malhotra announced the decisions of the Monetary Policy Committee (MPC) meeting on Friday. The central bank cut the repo rate by 25 basis points, bringing it down from 5.50 percent to 5.25 percent. Furthermore, the monetary policy stance was maintained as neutral.

The rate at which the Reserve Bank of India (RBI) lends to banks is called the repo rate. When the RBI reduces the repo rate, banks receive cheaper loans and pass this benefit on to customers. This means that loans like home and auto loans will become cheaper by up to 0.25% in the coming days. After the latest reduction, the EMI on a 20-year loan of Rs 20 lakh will decrease by up to Rs 310. Similarly, the EMI on a loan of Rs 30 lakh will decrease by up to Rs 465.

According to the RBI Governor, the central bank will add liquidity to the economy through open market operations by purchasing government securities worth ₹1 lakh crore. Additionally, the central bank will enter into a dollar-rupee swap arrangement worth ₹5 billion.

The central bank reduced the standing deposit facility (SDF) rate to 5 percent, while the marginal standing facility (MSF) rate was reduced to 5.50 percent. The MPC's previous decision in October was to keep the repo rate unchanged and maintain a neutral monetary policy stance.

RBI Governor Malhotra stated that key data for the third quarter of the current fiscal year indicates a pick-up in economic activity. Factors such as GST rationalization, improved prospects in agriculture, and improved corporate balance sheets will support economic activity. The central bank has projected GDP growth of 7.3 percent for the current fiscal year, down from a previous estimate of 6.8 percent.

Meanwhile, GDP growth is projected at 7 percent for the December quarter of this year, 6.5 percent for the March quarter of next year, 6.7 percent for the June quarter, and 6.8 percent for the September quarter. The central bank has projected retail inflation at 2 percent for the current fiscal year, down from an earlier estimate of 2.6 percent. The RBI Governor also stated that the country's foreign exchange reserves have risen to $686 billion, sufficient to provide robust import cover for 11 months.

Earlier, the RBI Governor had indicated last week that due to good macroeconomic indicators, there is scope for a repo rate cut to boost growth in the monetary policy review meeting on December 5.