The Reserve Bank of India (RBI), in its August 2 bi-monthly policy review has reduced the key Repo rate by 25 basis points (one basis point is 1/100th of a percentage point) to 6%
The Reverse Repo rate, meanwhile, has also been similarly reduced by 25 bps to 5.75% -- as have the Marginal Standing Facility Rate and the Bank Rate, each to 6.25%
The Repo rate is the rate at which the central bank lends money to commercial banks while the Reverse Repo rate is the rate at which it borrows money from commercial banks. Hence, a reduction in the Repo rate makes it more favourable for banks to borrow from the RBI, while a reduction in the Reverse Repo rate makes it unfavourable for banks to stow money with the RBI. Effectively, it's now more attractive for the banks to deploy loans.
The Third Bi-monthly Monetary Policy Statement, which can be found on the RBI's website states 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."
The Monetary Policy Committee, led by RBI Governor Urjit Patel, held a news conference after the announcement where Patel announced that the MPC had voted 4-2 for the rate cuts in order to provide a stimulus for growth, particularly in the private sector and in the housing market. The RBI, however, will continue with its 'Neutral' stance towards monetary policy in light of the trajectory of inflation being forecasted to increase from the current low.