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India cuts repo rate

Publication Date : 30-01-2013


Responding to the  rising clamour for moderation in its nine-month long tight money policy stance, the Reserve Bank of India Governor D Subbarao yesterday delivered more than asked for by announcing identical cuts of 25 basis points or a quarter of one per cent each in the central bank's short term--or repo--lending rate and the cash reserve ratio or CRR ( a percentage of deposits banks keep with RBI) in one go.

The new repo rate at 7.75 per cent takes immediate effect while the reduction in CRR to 4 per cent which will infuse 18,000 crore rupees in the banking system will take effect on February 9. (One crore is equivalent to 10 million)

The reverse repo rate stands adjusted at 6.75 per cent. Within hours of the RBI reducing the policy rates, IDBI Bank cut its lending and deposit rate by 0.25 per cent.

The RBI also lowered its inflation target for the current fiscal ending March 31 at 6.8 per cent from the earlier projection of 7.5 per cent. However, growth prospects are still dismal as it scaled down baseline GDP growth from 5.8 percent to 5.5 per cent citing lacklustre investment climate coupled with global risks impeding the growth prospects with an unexpected spill-over.

Breaking away from nine-months of laboured hawkish stance on Tuesday, Mr Subbarao assured the government and others “RBI has always been  in relentless pursuit of growth and low inflation.” Fresh policy initiatives were delayed mainly because of tight liquidity conditions.       

In a big relief to retail borrowers as well as the manufacturing sector, the lending banks are now expected to lower their interest rates.

Banking sector sources say many banks will start with lowering their base rates or the lowest interest rate at which it lends to consumers.

The chairman of the country's biggest lender State Bank of India Pratip Choudhuri spoke of the possibility of banks lowering their base rates in the next two days. The EMIs or equated monthly instalments on home, auto and consumer durables are likely to be slashed.

A quick calculation by analysts suggests if a bank cuts interest rate from 11.25 per cent to 11 per cent on a home loan of 50 lakh rupees for a 20 year duration the net saving on EMI will be 853 rupees. (One lakh is equivalent to 100,000)

Explaining the softening of credit and monetary policy stance in the last quarter of fiscal 2012-13, Subbarao said: “With the headline inflation likely to have peaked and non-food manufacturing product inflation declining steadily  over the last few months, there is an increasing likelihood of inflation remaining range-bound around the current level going into 2013-14. This provided space, albeit limited, for monetary policy to give greater emphasis on growth risks. The above policy guidance will, however, be conditioned by evolving growth-inflation dynamic and management of risks from twin (fiscal and current account) deficits.

While the monetary policy stance has sought to balance the growth-inflation dynamic through calibrated easing, it is critical now to arrest the loss of growth momentum without endangering external stability since global growth recovery is likely to be anaemic and also fraught with significant downwards risks. The moderation in inflation conditions provides  the opportunity  for monetary policy to act in conjunction with fiscal and other measures to stem growth risks.”  

The RBI wants the government to act on more reforms crucial for raising potential growth in medium term. “While a series of policy initiatives by the government has boosted market sentiment, it will take time to reverse the investment slowdown and reinvigorate growth since investment activity has been below desired levels and consumption demand has started to decelerate.” 


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