For Second Consecutive Time RBI Cuts Repo Rate By 25 Basis Points To 6 Per Cent; Policy Stance Stays Neutral

For the second time in as many months, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) cut its repo rate (the rate at which it lends to banks) by 25 basis points, from the 6.25 per cent to 6 per cent. The Committee has continued to maintain its monetary policy stance at neutral.

While four of the six-member of the MPC voted in favour of the rate cut, the remaining two voted in negative. Earlier on 7 February, MPC had reduced the policy repo rate by 25 basis points from 6.5 per cent to 6.25 per cent with immediate effect.

However, analysts note that the current rate cut will do little to bring down the interest rates charged by banks on loans to individuals and corporate entities. Due to weak policy transmission in India’s banking system, the February rate cut of 25 basis from RBI’s side led to a token cut of only 5-10 basis points by banks.

Deposit-Credit Conundrum

On the other hand, banks have pointed out that they are unable to cut interest rates more aggressively as they currently face an acute shortage of deposits. Any significant cut in interest rates for loans will mean that banks have to bring down the interest they pay to depositors. With lower deposit rates, customers will park their surplus money in other financial avenues rather than with the banks.

MPC created under the current NDA government, is the apex authority that decides on the interest rates in India.

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