The Reserve Bank of India (RBI) on Wednesday cut its key lending rate by 25 basis points to its lowest since November 2010, raising hopes of lower EMIs on home and car loans.
The repo rate -- the rate at which the RBI lends to banks -- now stands at 6%. The central bank also cut the reverse repo rate by 25 bps to 5.75%. This is the first rate cut since October 2016.
The move came on expected lines as retail inflation fell to a more than five-year low of 1.54% in June, the main consideration for the RBI monetary policy committee (MPC).
MPC headed by RBI governor Urjit Patel stressed on need to reinvigorate private investments, clear infra bottlenecks and provide big thrust to Pradhan Mantri Awas Yojana. While the central bank pledged its continuous support in tackling the bad debt choking the banking system.
The cut was also the first since the government’s shock withdrawal of high-denomination currency notes in November and unveiling of the goods and services tax last month.
The decision was taken by the MPC after two days of deliberations in Mumbai.
The central bank had set a medium-term target for inflation -- as measured by the consumer price index (CPI) -- at 4% with a headroom of 2%.
The panel, in its previous bi-monthly review in June, retained the repo rate at 6.25% for the fourth straight time citing risk to inflation.
On Tuesday, the State Bank of India – the country’s largest lender and market leader -- reduced interest rate on savings bank deposits by 50 basis points, putting pressure on the RBI to go for the rate cut.