Arvind Subramanian welcomes RBI's decision to cut down repo rate

Chief Economic Advisor Arvind Subramanian on Thursday welcomed the Reserve Bank of India's decision to cut down repo rate by 25 basis points from eight percent to 7.75 percent, saying the reduction will encourage the consumers and industries to spend more.

"This has not come a moment too soon for the economy. Spending by firms and by consumers will increase. And, therefore, this will act directly and indirectly by allowing the credit system to flow and by improving the balance system of the banks and private sector," Subramanian told the media here.

"If the strong disinflation continues, if the policy environment is right, then the RBI may reduce the repo rate further," he added.

Meanwhile, Akash Jindal, a market expert, predicted that the reduction in repo rate will cause the stock market to boom.

"The reduction of the rate of interest under the repo will be very beneficial for the economy. If banks reduce rates of interest, then the borrowing cost of industries and the corporate sector will reduce dramatically, which in turn will increase their growth. This will cause the stock market to boom and job opportunities too will increase. The common man will benefit by having his EMIs on house and vehicle loans decrease," he said.

"This reduction was being demanded by the RBI for a long time, but they were waiting to see if inflation comes under control. Now that the Wholesale Price Index (WPI) has dropped to a minimal level, the RBI can concentrate on growth," he added.

The RBI has announced this rate cut ahead of its next monetary policy on February 3. This cut in repo rate is likely to reduce interests on various loans.

The repo rate is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds.

The RBI's move comes after the Wholesale Price Index (WPI)-based inflation moved up marginally in December to 0.11 percent from zero level in November, reversing the six month declining trend.

This is in contrast to the WPI inflation in December 2013, which stood at 6.40 percent.