In its June review meet, the MPC had held the repo rate citing the risk of fiscal slippages.
Mumbai: The Reserve Bank of India on Wednesday slashed benchmark repo rate by 25 bps from present 6.25 per cent to 6 per cent -- the lowest in six and a half years -- while taking forward its neutral policy stance.
RBI governor Urjit Patel said the cooling inflation, falling fuel and food prices, the smooth rollout of GST and a favourable monsoon "opened up some space for monetary policy accomodation".
This was the sixth bi-monthly policy review by RBI's Monetary Policy Committee that was formed last year on the lines of Federal Open Market Committee in the US.
The committee report stated that: "The decision of the MPC is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth".
"Recognising that inflation is however expected to rise from the lows in the rest of the year, the MPC stuck to its neutral stance," said Patel.
The reverse repo rate has also been reduced by 25 bps to 5.75 per cent, the committee said.
The reduction in repo rate will have a direct impact on loans as commercial banks will be borrowing money from the repo rate at a lower rate. Housing loans, education loans, business loans, etc will become cheaper.
The committee stressed on the urgent need to reinvigorate private investments, clear infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana. It said that the RBI is working in close coordination with the government to resolve large stressed corporate borrowings and recapitalise public sector banks.
While four members of the MPC voted for the 25 bps cut, non-RBI member Dr. Ravindra H. Dholakia voted for a policy rate reduction of 50 basis points. Dr. Michael Debabrata Patra, the executive director of RBI, voted for a status quo.
The MPC has six members -- governor Urjit Patel, two deputy governors and three government representatives.
This development comes against the backdrop of the government, economists and lenders pushing hard for a rate cut which the RBI has held since October last year when Urjit Patel had announced a 25 bps cut in his first policy review as RBI governor.
Forty of 56 economists polled by Reuters predicted the RBI will cut its repo rate by 25 basis points to 6.00 percent - the lowest since November 2010.
Cooling food prices sent June consumer inflation to a more than five-year low of 1.54 per cent, way below RBI’s fixed 4 per cent range.