General Knowledge and Current Affairs are an important component of many competitive exams, such as the UPSC Civil Services Examination, SSC CGL Exam, Bank PO & other PSU entrance tests, etc. Therefore, understanding the concepts/terms/events that are significant in our daily lives is critical for aspirants. To make your preparation easier and to help you score better in your exams, we at PaGaLGuY bring you brief articles on important phenomena, concepts and events. Spend just 15 minutes every day on pagalguy.com and score at least 10 more marks in your General Studies paper!
To access all the content available on PaGaLGuY, login to https://www.pagalguy.com/
In this article, we would discuss the recent repo rate cut implemented by the RBI.
On September 29, the Reserve Bank of India in its fourth
bi-monthly monetary policy slashed repo rate by a more-than-expected 50 basis
points (or 0.50%) to 6.75%, with inflation at record lows and the economy ahead
of a major slow down. The repo rate now stands a four-and-a-half year low.
Consequently, the reverse repo rate under the liquidity
adjustment facility (LAF-system which allows banks to borrow money from the
RBI) has been changed to 5.75 %, and the marginal standing facility (MSF) rate
and the Bank Rate to 7.75 %.
Highlights of the 4th bi-monthly monetary policy review
–
The Cash Reserve Ratio (CRR) has been kept
unchanged at 4%
–
RBI has stated that inflation is expected to reach
5.8% by January 2016. Thus, the focus will be on bringing inflation to around
5% by the end of FY17.
–
GDP growth is estimated at 7.4% and is likely to
rise in the latter part of the fiscal.
–
FPI investment in debt securities will be
henceforth announced or fixed in rupee terms. Limit for FPI investment in government
bonds will be increased in stages to 5% of outstanding stock by March 2018
–
The RBI will issue final guidelines on base rate
computation by November-end.
–
The RBI will continue with daily variable rate
repos and reverse repos to smooth liquidity
–
The central bank will continue to provide
liquidity under overnight repos wherein the credit limit will be 0.25% of
bank-wise net demand and time liability (NDTL) at the LAF repo rate. Liquidity
will be provided under the 14-day term repos as well as long-term repos of upto
0.75% of NDTL of the banking systems through auctions.
–
The fifth bi-monthly monetary policy review
decisions will be out on December 1
What led the RBI to
cut repo rate
Decline in inflation: Inflation has dropped to a nine-month low. Wholesale and retail inflation
saw a new all-time low of -4.95% and
3.66%. CPI inflation excluding food and fuel decreased for the second
consecutive month in August, mainly due to the decline in petrol and diesel
prices bringing down inflation in transportation. Despite the monsoon deficit,
the RBI has said that food inflation has been contained.
To spur growth: While
growth in the emerging markets has seen a moderate rise, global trade has
plummeted and downside risks (an estimate of how much an investor stands to
lose due to a drop in a security’s value) have increased. However, the RBI has
said India is likely to see a tentative economic growth.
Higher food grain
production expected: The RBI has said that area under sowing has expanded modestly
from a year ago period. Estimates indicate that food grain production will be
higher than last year as a result of efforts taken limit the adverse effects of
scanty rainfall this year.
Federal Reserve’s
stance: The US central bank’s policy rate decision is being keenly followed
by all central bankers, including RBI Governor Raghuram G Rajan. In the
September 16-17 Federal Open Market Committee (FOMC) meeting, the Federal
Reserve postponed the decision to change policy rates though Janet Yellen has
hinted at raising the rates.
Drive Consumption: Fuelling
consumption has been one of the main
aims of the central bank as key sectors like automobile, real estate, among
others have been in a state of inertia due to lack of demand. The rate cut is
most opportune for banks that can lower interest rates before the festive
season. It is hoped that timely transmission of the rate cut will drive demand
for cars, houses, and consumer durables.
Inflationary trends
The RBI stated that going forward, inflation is likely to go
up from September for a few months as favourable base effects reverse. Food
inflation could improve if the increase in sown area translates into higher
production. Moderate increases in minimum support prices should keep cereal
inflation subdued, while controlled international food price inflation should keep
prices of sugar and edible oil, and food inflation as a whole, low. Proactive
supply-side management by the government should be in place to prevent any food
price pressures, especially in case of onion and pulses. The ramifications of
the recent depreciation of the rupee will have to be carefully monitored,
although benign crude prices should have an offsetting effect. Taking all this
into consideration, inflation is expected to reach 5.8 % in January 2016, a
shade lower than the August projection.
Banks also cut lending
rates
Following the RBI’s rate cut, most private and public banks reduced
their interest rates. State Bank of India was the first to slash its minimum lending
rate (or base rate) by 0.40% to 9.30%. Axis Bank was the first private bank to
bring down its base rate to 9.50%. Largest private sector lender ICICI Bank Ltd
cut its base rate by 0.35% to 9.35%. Kotak Mahindra Bank and Yes Bank also reduced
rates by 0.25%. Bank of Baroda, Punjab National Bank, Bank of India, UCO Bank,
Andhra Bank, Oriental Bank of Commerce and IDBI Bank, among others reduced
their base rates by 25-40 bps.
However, there have been some dissimilarities in the
transmission of individual banks’ rate cuts. For
instance: SBI and ICICI decided to pass on the benefit of their base rate cut
to existing customers but are withholding a part of it to new customers. The
reason for this move, analysts feel, is that banks expect a reduction
in base rate when the new method of calculation is finalised and due to future repo rate cuts. Thus, a few banks have decided to increase their net
interest rate spread (or profit margin) so that even after a reduction in base
rate, they have a decent margin.
To get fresh updates about different exams on your Facebook & Twitter timelines, subscribe to our pages created specifically for them. We will post only exam specific links on these pages:
Bank PO:
Facebook: https://www.facebook.com/pagalguybankpo
Twitter: https://twitter.com/PaGaLGuYBankPO
SSC – CGL:
Facebook: https://www.pagalguy.com/ssc
Twitter: https://twitter.com/pagalguyssc
UPSC:
Facebook: https://www.facebook.com/pages/Pagalguy-UPSC/951926044840262
Twitter: https://twitter.com/PaGaLGuYUPSC