Reserve Bank of India announced a 25 basis point (0.25 percentage point) cut in Repo rate. Repo rate is the rate at which money is lended by RBI to Commercial Banks.

Whether a deeper 50 basis point cut was necessary, given the sharp slowdown in the economy, is debatable. With inflation well under the benchmark figure of 4%, the stage was set for the RBI to reduce Repo rate.

Thus, RBI has changed its policy stance to ‘accommodative’ from ‘neutral’. RBI Governor Shaktikanta Das made statement at the press conference that ensuring systemic liquidity will remain a priority for the central bank.

Banks not passing interest rate cut to customers

Banks not passing interest rate cut to customers

RBI has to do something to make banks pass on the reduction in the interest rates. By its own admission, only 21 of the cumulative 50 basis points rate cut effected by the RBI in the February and April policies has been passed on to borrowers by banks. The excuse from banks was that liquidity was tight and so deposit rates could not be cut. However, liquidity has considerably improved in the past.