As expected, the Monetary Policy Committee (MPC) has unanimously voted to cut the repo rate by 25 basis points, or 0.25%, for the third consecutive time. The MPC has also changed its policy from “neutral” to “accommodative”; this means the RBI will likely cut the repo rate in the future as well.
The MPC had a “neutral” policy stance, meaning the RBI could equally choose to increase or decrease the repo rate. However, the shift to “accommodative” means India could see more reductions in the repo rate.
A cut in the repo rate and policy stance indicating further cuts is an effort to increase economic activity in the country.
Explaining this rationale, the MPC said, “Global economic activity has been losing pace after a somewhat improved performance in Q1:2019, reflecting further slowdown in trade and manufacturing activity.”
The Monetary Policy Committee, explained
The Monetary Policy Committee (MPC) is a body that formulates the country’s monetary policy on behalf of the Reserve Bank of India (RBI). It meets four times a year.
In 2016, the RBI had said the six-member MPC will comprise the RBI governor, deputy governor, and an official, and three independent banking and economics experts a governmental search committee would choose, says Business Line.
Currently, Indian Statistical Institute professor Chetan Ghate, Delhi School of Economics Director Pami Dua, and IIM Ahmedabad professor Ravindra H. Dholakia are the members of the MPC.
The MPC helps the RBI come to an informed, unbiased decision on the country’s monetary policy, including repo rates, bank rates, and cash reserve ratios. All members on the panel cast their votes for or against a certain policy. If the MPC members’ vote on policy results is a tie, the RBI governor gets the deciding vote.
The MPC allows for government officials and banking and finance experts to have a dialogue on policy away from lobbies and politicians. However, the RBI and government can still disagree, especially if the apex bank feels that the government is unduly influencing its decisions.
Repo rate: what it is and why it matters
The repo rate—repurchase rate—is the rate of interest at which the RBI provides loans to banks.
The RBI can use the repo rate to control inflation by increasing the rate. This in turn discourages banks from borrowing money, reduces the money in circulation, and lowers inflation in the process.
In contrast, the RBI can decrease the repo rate and encourage banks to borrow more. More funds means that banks can offer more loans to their customers and spur economic growth. A low repo rate eases monetary pressure, as well.
What the latest cut means
MPC’s unanimous vote to slash the repo rate by 25 basis points—from 6% to 5.75%—is the third consistent 25 basis point cut since February.
Now, while home and car loans will become cheaper, those who deposit money in the bank will earn a lower rate of interest. Consumer inflation has also held steady below the 4% threshold for the last two months—2.92% and 2.86% in April and May, respectively.
The US has established a 25% hike in tariffs on Chinese goods worth $200 billion; the move came after Trump became frustrated at China’s trade surplus and the slow pace of talks with the US.
The Trump administration has also placed Chinese telecom company Huawei on a trading blacklist, making it more difficult for the company to do business in the US.
With a low repo rate, the Indian government hopes to not only undercut the ripples of the US-China trade war but also boost domestic economic activity and bring India back on the 7% growth trajectory.
Rhea Arora is a Staff Writer at Qrius.