RBI cuts repo rate by 35 basis points to 5.40%! Great news for home loan and auto loan borrowers

The Reserve Bank of India on Wednesday cut the  policy repo rate under the liquidity adjustment facility (LAF) by 35 basis points (bps) from 5.75 per cent to 5.40 per cent with immediate effect. In its third Bi-monthly Monetary Policy Statement, the RBI said that the reverse repo rate under the LAF stands revised to 5.15 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 5.65 per cent. The MPC has also decided to maintain the accommodative stance of monetary policy. This is the fourth time in a row that RBI has reduced the repo rate. 

Overall, the RBI has lowered the key policy rate by a cumulative 110 basis points in the current easing cycle. The move is in line with market expectations. This is the first time when the bank has gone with an unconventional measure instead of the usual practice of using multiples of 25. 

The change was suggested by RBI Governor Shaktikanta Das earlier this year.

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"These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth," the Central Bank said. RBI said that the Global economic activity has slowed down since the meeting of the MPC in June 2019 which has one of the key factors behind the latest rate cut.

It said that economic activity remained weak in major emerging market economies (EMEs), pulled down mainly by slowing external demand. "The Chinese economy decelerated to a multi-year low in Q2, while in Russia subdued economic activity in Q1 continued into Q2 on slowing exports and retail sales. In Brazil, the economy is struggling to gain momentum after contracting in Q1 on weak service sector activity and declining industrial production. Economic activity in South Africa appears to be losing pace in Q2 as the manufacturing purchasing managers’ index (PMI) contracted for the sixth month in succession in June and business confidence remained weak," it said.