RBI cuts repo rate by 25 basis points to 7.5 per cent

The Reserve Bank of India (RBI) on 4 March 2015 has cut down repo rate by 25 basis points to 7.5 percent from 7.75 percent, with immediate effect. However, RBI has kept the cash reserve ratio (CRR) unchanged at 4 percent.

It is the second change in rates by 25 basis points since January 2015. With this change, RBI is signaling that it was convinced by the fiscal consolidation measures announced in the Budget.

Reasons behind the rate cut

  • Disinflation is occurring as per the RBI norms set in January 2014 and at a faster pace than it was envisaged earlier.
  • Fiscal consolidation measures announced by Union Government in the Union Budget 2015-16.
  • Lower international energy prices and Union Governments intent to shift from spending on subsidies to spending on infrastructure.
  • Also the better target mechanism of government through direct transfers to further reduce subsidies through direct transfers.
  • Government’s decision of cooperative federalism that will transfer significantly larger amount to the states.
  • Thus devolving responsibility for funding central programmes as it will make state budget deficits narrower and the general fiscal deficit will be lower.

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