RBI cuts repo rate by 25 basis points - Reserve Bank of India governor- Navbharat Times Photodhamal

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Reserve Bank of India governor Raghuram Rajan on Wednesday brought down its key policy rate by 25 basis points citing that the fiscal consolidation was better than what numbers show and that the combined fiscal deficit is much lower due to the government transferring more funds to the states.

In This Pic : Raghuram Rajan

Pic Courtesy : PTI

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"The true quantum of fiscal consolidation may be higher than in the headline numbers. Also, the government is transferring a significantly larger amount to the states, without entirely devolving responsibility for funding central programmes. To the extent that state budget deficits narrow, the general fiscal deficit will be lower," Rajan said in a statement on Wednesday.

In This Pic : Raghuram Rajan

Pic Courtesy : PTI

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"It has been decided to reduce the policy repo rate under the liquidity adjustment facility by 25 basis points from 7.75% to 7.5% with immediate effect," the statement said.

In This Pic : Raghuram Rajan

Pic Courtesy : BCCL

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The move comes less than a week after the Union Budget where finance minister Arun Jaitley announced the signing of a monetary policy framework where RBI has been given a flexible inflation target of 4% in the medium term. The government also said that it will amend the RBI act to set up a monetary policy committee which will henceforth decide on policy rate.

In This Pic : Raghuram Rajan

Pic Courtesy : PTI

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This is the first time that the Reserve Bank of India has announced a monetary policy action ahead of markets opening. Following the move shares of public sector bank traded up as they are expected to generate higher profit from sales of government bonds.

In This Pic : Raghuram Rajan

Pic Courtesy : BCCL