RBI reduces repo rate to combat COVID-19 impact

Reserve Bank of India (RBI) today announced a 75 bps cut in policy repo rates. The repo rates will be reduced from 5.15 per cent to 4.4 per cent. The reverse repo rate has been reduced by 90 bps to four per cent. 

Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to the commercial banks. Repo rate is used by monetary authorities to control inflation, money supply and some uncommon events like the current Coronavirus pandemic. The reduction in repo rates should theoretically result in a reduction in rates offered by banks for loans and even investment-saving products, such as fixed deposits and recurring deposits.

Such measures are mostly used to stimulate the economy in times of slowdown. With a reduction in rates for loans, individuals and institutions find it cheaper to avail loans thereby, resulting in more spending by them. For example-the reduction in loan rates make housing and other large purchases cheaper due to loan EMI reduction. Even on the industry front, with interest rate reduction, the companies find it cheaper to expand as the interest cost is reduced. This however has a risk of raising inflation in the short-term if the production of goods and services do not increase in-line with the money supply.

RBI’s rate cut is in-line with the actions taken by other central banks all over the world in the past few months to help stimulate their respective economies.