The Reserve Bank of India headquarters in Mumbai. Photo: AFP
The Reserve Bank of India headquarters in Mumbai. Photo: AFP

India’s central bank has cut repo rates by 25 basis points to 5.75%, the lowest since 2010. The cut by the Reserve Bank of India was the third this year, and RBI hinted at more such cuts to come.

The move is expected to make mortgages, auto loans and other borrowings cheaper, but the final call rests with respective banks.

Repo is short for repurchase agreement, a form of short-term borrowing mainly in government securities. A dealer sells the underlying securities to investors, to raise money, then buys them back shortly afterwards – usually the following day – at a slightly higher price. The repo rate is the rate at which the RBI lends money to the commercial banks, in case of any shortfall of funds.

Following the past two rate cuts, the banks have been reluctant to pass on the benefits to customers. The lenders are finding it difficult because they are facing a mismatch between deposits and credit growth.

The six members of the monetary policy committee of the RBI in their bi-monthly meeting unanimously decided on cutting repo rates in order to boost sagging private consumption. It may be recalled that during the previous committee meeting in April the RBI Governor Shaktikanta Das and Deputy Governor Viral Acharya were at loggerheads over rate cuts.

Also Read: India’s RBI chief, deputy clash over rate cut

Benign inflation and buffer food grain stocks emboldened the central bank to take such a step. The return of the Narendra Modi Government to power has also generated hope of fiscal responsibility.

The RBI Governor has expressed concern about weakening growth impulses, adding that the central bank has changed its policy from “neutral” to “accommodative” and rate hikes are now off the table, Times of India reports.

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