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All You Need to Know about RBI Rate Cut

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All You Need to Know about RBI Rate Cut
Rajat Mishra - 06 June 2019

The Monetary Policy Committee of the Reserve Bank of India on Thursday goes for 25 bps (Basis point is one-hundredth of per cent) rate cut in its second bi-monthly policy review of this financial year. Earlier this year the RBI slashed the repo rate (the rate at which commercial banks borrow money from the RBI) which from 6.50 per cent to 6per cent in two consecutive rate cuts. And this is the third rate cut by the RBI after which the repo rate now stands at 5.75 per cent. The RBI will use the monetary policy to stimulate the economy and will set the stage for Union Budget that is slated to be presented on 5th July. The RBI also changed its stance from ‘neutral’ to ‘accommodative’. Many wealth advisors and economists are happy with the unanimous decision of the RBI in favour of a rate cut. Today, all six member of the MPC voted in favour of a rate cut.

In order to give you a quick recap about past rate cuts decision taken by the RBI. On 7th of February, the RBI reduced repo rate from 6.5 per cent to 6.25 per cent and introduced a change in monetary policy stance from ‘Calibrated tightening’ to ‘neutral’. The Six members MPC, four members voted for a rate cut and two members votes for status quo. And on April 4, the RBI reduced repo rate from 6.25% to 6% and five MPC members voted to maintain ‘neutral’ stance and one voted to change it to ‘accommodative’. Four MPC members voted for a cut in repo rate and two voted for the status quo.

What Does Monetary Policy Stance Stand For?

The Indian central bank and most of its counterparts give three types of policy stance to the market: accommodative, tight, neutral. ‘Accommodative’ in other words, the central bank is telling the market to expect a rate cut anytime,‘neutral which do not have any particular meaning, this means anything can happen anytime and ‘calibrated tightening’ means that rate cut is off the table and MPC is not bound to increase the rate at every meeting.

Is RBI Rate Cut Going to Benefit You?

Rohit Khandelwal, wealth advisor and Managing Director of Money matters just after reduction of rate cut by the RBI spoke to Outlook money and said : “ That I am bit sceptical about its benefits for customers as earlier after rate cuts I have seen that the benefit has not been passed on to the customers by the commercial banks.”

As the State Bank of India, the country’s largest lender by assets has cut its key lending rate by only 10 basis points in response to the 50 bps cuts by the RBI. While all other commercial banks have reduced lending rates by only 5-10 basis point over the past four months against the central banks 50 basis point reduction during the same period.

Rohit Khandelwal also added that this rate cut might be beneficial for the macro-economy but it’s not going to benefit the micro-economy of the nation. According to him, this rate cut will be going to benefit the customers only if the banks reduce their borrowing rates and lower the fixed deposit rate. Seeing the current market scenario, he advised people to invest only in equity market rather than debt market.

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