Reserve Bank of India cuts the repo rate by 50 basis point unexpectedly making repo rate 6.75% lowest of the last four and half year which will impact both on borrowing and investment.
What is Repo Rate?
The interest rate at which RBI lends money to scheduled banks like SBI, ICICI etc. If the Repo Rate is low then the liquidity in the market increases which will boast the investment in the market.
Union Government and RBI signed an agreement under which the responsibility of the central bank will be to control the price rise above the other objectives of the Monetary Policy.
Important points under the agreement
- RBI should bringing inflation below 6% by January 2016. Consumer Inflation target was set at 4% with a band of plus or minus 2% for the financial year 2016-17.
- Central bank will be deemed to have missed its target if consumer inflation remains above the 6 per cent level for three consecutive quarters during 2015-16 or if it remains below 2 per cent for three consecutive quarters during the year 2016-17.
- If RBI misses target it has to explain to the government the causes, and what steps it intends to take to steer inflation back within a given time.
As RBI is sure that it can meet the target of 6% inflation by January 2016 it decided to cut the repo rate.
Reason for cutting Repo Rate:
- RBI decided to cut repo rate as trade deficit narrowing, inflation under control and weakening global activities.
- With the promotion of industry in India and weaken global market there was a need for domestic demand which will lead to acceleration of domestic investment cycle.
- With the inflation under control the cut in repo rate was need for the growth in the economy
Impact of cutting Repo Rate is
- Base rate reduction
- Business investment
- Cheaper Credits
- Infrastructure investment to get a push
- Home loans and corporate loans to be cheaper
- Housing Sector, Realty Sector will get a boost
RBI also announced higher investment limits in rupee terms in government securities by FPIs (foreign portfolio investors). RBI allowed foreign ownership of government securities through FPIs up to 5%. RBI also decided to allow investment of FPIs in State Development Loans.
What is FPI?
FPI are the foreign investor who wants to invest in Indian stock market for shorter or longer duration with the intention to make more profits.