The Reserve Bank of India (RBI) on Tuesday announced a rate of by 25 basis points to 6.25 percent, as a newly set up panel felt that inflation levels were low enough to reduce loan rates.
The decision of the monetary policy committee (MPC), headed by new RBI governor Urjit Patel, will likely cheer business leaders and households as cheaper loans will aid investment and spending.
The six-member Monetary Policy Committee, which voted 6-0 in favour of a cut, noted that an improvement in sowing along with supply management measures will improve the food inflation outlook.
"The government has announced several measures to cool food inflation pressures, especially with regard to pulses. These measures should help in moderating the momentum of food inflation in the months ahead. This has opened up space for policy action," said the statement.
The committee also noted that the potential cost push pressures that may emerge, including the seventh pay commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices.
A lower repo rate would mean households may expect cheaper bank loans to buy houses and goods such as cars, which peak during the festival shopping season in October and November.
The RBI and the government have set a retail inflation target of four percent for the next five years with an upper tolerance level of six percent and lower limit of two percent.
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