RBI cuts Repo Rate by 25 basis points, GDP forecast for 2019-20 revised to 6.1 %

New Delhi, Oct 04: Amid the weak economic activity, the Reserve Bank of India (RBI) has cut the Repo Rate by 25 basis points, from 5.40 per cent to 5.15 per cent. The reverse repo rate now stands at 4.90 per cent.

The RBI, which has already reduced the key policy rate four times in the current calendar year, is held its bi-monthly monetary policy meet today.

GDP outlook for 2019-20 has been revised to 6.1 per cent, from 6.9 per cent. GDP outlook, for 2020-21, has been revised to 7.2 per cent.

Once in every two months, the Reserve Bank of India (RBI) makes a Monetary Policy announcement in which the central bank announces, among many other things, the changes in Repo Rate and Reverse Repo Rate. These rates are decided by the six-member monetary policy committee (MPC), which is headed by RBI Governor Shaktikanta Das.

Goldman Sachs said that the RBI is expected to go for a further rate cut in the review meeting amid weak economic activity and benign inflation.

How Repo Rate cut affects economy?

Repo Rate is the rate of interest at which the RBI lends money to banks. There are complex macroeconomic theories that explain these in terms that hardly make sense to a common person.

Simply put, the government would want to lower the Repo Rate when it wants to boost economic activity. It is a way to infuse money or cash (liquidity) in the economy when there are signs of slow down. If Repo Rate comes down, then it would cost banks less to borrow from the RBI. This, in turn, allows the banks to lend in the market at a lower price without having to compromise with its own profit margin.

Once the lending rate of banks come down, the businesses would hesitate less to borrow and invest. After all, a business, of any kind, is about earning more money than what has been spent. A large part of what has been spent or investment would be in the form of borrowings from the bank.

So, what a business or company earns should not only cover its costs on wages to the employees, raw material, process involved in getting a product or service ready for market, but also the interest it pays on the money borrowed from banks.

Essentially, when the lending rates come down, more businesses would want to borrow and invest in the expansion of the business which in turn boosts the economic activity.