Soon after the Union Budget, RBI governor Raghuram Rajan reduced the repo rate by 25 basis points to 7.5%, on account of improved government finances. This move caused Sensex to reach all time high – 30,000.
This is also the second time that the RBI has cut rates outside its scheduled reviews to boost investment and growth.
Indifference of Banks
- Though this is RBI’s second rate cut, still only three out of 45 banks- Union Bank, United Bank and Karur Vysya- have so far lowered the benchmark rates, while the others chose to pocket the gains at the cost of borrowers.
- Banks are refusing to lower rates immediately due to earning pressure on account of rising bad loans.
Reasons for the cut
- Improvement in the government’s finances
- The government is transferring a significantly larger amount to the states without entirely devolving responsibility for funding central programmes
- Due to lower international energy prices, there is an intent to shift from spending on subsidies to spending on infrastructure.
