The Reserve Bank of India on Tuesday cut repo rate by 25 basis points to 6.25 per cent from 6.50 per cent in its fourth bi-monthly policy statement for the year 2016-17.
All six member of the Monetary Policy Committee, which met for the first time on interest rates under the new RBI Governor, voted in favour of a rate cut.
The latest cut could pave way for a possible reduction in the EMIs of housing and car loans.
The cut implies a reduction in the rate at which banks borrow money and vice versa. Whenever banks have any shortage of funds, they can borrow from the RBI.
Similarly, the reverse repo rate which stands at 5.75 per cent is the rate at which RBI borrows from banks.
Therefore, when the interest rate is low, lending by banking system becomes a bit cheaper, leading to a fall in EMI, thereby providing an overall boost to industry and economy.
In its policy statement, the central back said that the decision of the Monetary Policy Committee was consistent with the accommodative stance of the monetary policy. Retail inflation is expected to be 5 per cent by March 2017 with upside risk.
