Why it did so?
RBI in February 2016 laid down two conditions that must be met before it could consider cutting rates again. The first, that inflation should show a downward trend. The second requirement was that the government should undertake “structural reforms”.
| Q |
A |
| Context? |
- On 5th April, 2016 the RBI cut the repo rate — the rate at which it loans funds to the banking system — by 25 basis points.
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| Why it did so? |
- RBI in February 2016 laid down two conditions that must be met before it could consider cutting rates again. The first, that inflation should show a downward trend. The second requirement was that the government should undertake “structural reforms”.
- Evidently, the RBI is satisfied with the movement on both the conditions it had laid down.
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| Challenges in monetary policy transmission? |
- In 2015, the RBI cut 125 basis points but only 60 of those were transmitted by the banks to the market.
- The challenge now is to ensure effective transmission — not just of this cut but also of those that preceded it
- More cuts can happen in the year if warranted. In this regard, two key changes over the last policy statement are likely to yield deeper cuts — possibly even more than 25 basis points — for the aam aadmi.
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- One, the cut in the small savings rate in March; It will incentivise banks to bring down their deposit rates and, as a result, their lending rates.
- Two, the shift to the “Marginal Cost of Funds-based Lending Rate” mechanism for the banks since April 1; it will allow them to charge less on loans since they can base it on the marginal cost of funds instead of the average cost.
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WORD FROM TEAM GS-SCORE –
| Relevant for |
Economy of GS:3
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| For further detail |
Refer article titled “Cutting it fine” from Indian express dated April 6, 2016 |