The Reserve Bank of India cut repo rates by 0.50 per cent to 8.0 per cent. Repo rate is the rate at which banks borrow money from RBI. This is a reference rate used by banks to lend to their customers like companies and individuals.
The reverse repo rate, or the rate at which it sucks out liquidity from the system by taking money from banks, has also been reduced by 0.50 per cent.
The cash reserve ratio, the percentage of deposits kept by banks with RBI, was left unchanged at 4.75 per cent.
However, there is "limited space for further reduction in rates", RBI GOvernor D. Subbarao said, adding that upside risks to inflation persist.
The RBI is ready to take steps if the liquidity situation worsens, he said. Liquidity conditions have eased recently, he said, and that it is within the RBI's comfort.
Montek Singh Ahluwalia, Deputy Chairman of Planning Commission said that the RBI’s credit policy came on expected lines.
"It is a good signal but many other things also need to happen in during the course of the year. It indicates that RBI is satisfied that the inflationary pressures are not the only thing to worry about. RBI Governor is indicating that the economy is ready for a stimulus with out worrying about inflation. I would like inflation to come down a little bit," he added.
Falling manufacturing output and slow growth has pushed Reserve Bank of India to cut benchmark rates that could reduce cost of borrowing for corporates and individuals.
Bankers are likely to pass on the 0.50 per cent cut to borrowers. So home loans, car loans, personal loans could get cheaper to that extent.
A poll of bankers conducted by NDTV Profit showed that 70% respondents were confident of a 25 basis point cut in the repo rate, while 60% felt that RBI will leave CRR untouched.
Tough economic environment
*The RBI move comes in the backdrop of some difficult circumstances where economic recovery is likely to be slow and inflation continues to remain high.
*Releasing the macroeconomic report on Monday, the central bank cut its gross domestic report estimate for fiscal 2012-13 to 7.2%, adding that growth, which would improve moderately, must be in a non-inflationary manner. It warned that growth may have bottomed out in the third quarter of 2011-12, and that the recovery ahead was likely to be slow.
* Inflation fell marginally to 6.89% in March from 6.95% in February. Headline inflation, as measured by the Wholesale Price Index, was higher than the 6.6% estimated by an NDTV Profit poll of experts.
* Food inflation, which had been hovering just above the 6% mark in February, surged to 9.94%.
*The RBI report also said that oil prices and a weak rupee posed inflationary risks, and warned that inflation could remain sticky in the current fiscal, calling for a policy that would not exacerbate inflation.
* So inflation and growth, along with a high credit deposit ratio and high government borrowing, could have been reasons enough for Governor Subbarao to leave the policy rate untouched.
* The central bank noted in its report that its two-stage 125 basis point cut in cash reserve ratio (CRR) had eased liquidity pressure. CRR is the portion of deposits that banks must keep with the RBI. One basis point is one-hundredth of a percentage point.
*Credit deposit ratio, or the ratio of the total outstanding credit in the banking system and the deposits held by them, stood at 78.1% in March, rising due to declining deposit growth.
* Government borrowing, too, has not been helping the central bank’s cause. The government plans to meet 65% of its full-year borrowing target in six months, clearly indicating that it has no plans to cut expenditure.
* To add to that the fall in the rupee hurts RBI’s ability to rapidly cut rates to stimulate growth. While RBI injected liquidity through open market operations or OMO by buying government bonds from banks, it had to buy rupees to sell dollars. That neutralized the impact of the OMO, a tool used by central banks to inject liquidity in the banking system.
Source:http://profit.ndtv.com/News/Article/reserve-bank-of-india-cuts-policy-rate-by-0-50--302085?pfrom=home-lateststories
The reverse repo rate, or the rate at which it sucks out liquidity from the system by taking money from banks, has also been reduced by 0.50 per cent.
The cash reserve ratio, the percentage of deposits kept by banks with RBI, was left unchanged at 4.75 per cent.
However, there is "limited space for further reduction in rates", RBI GOvernor D. Subbarao said, adding that upside risks to inflation persist.
The RBI is ready to take steps if the liquidity situation worsens, he said. Liquidity conditions have eased recently, he said, and that it is within the RBI's comfort.
Montek Singh Ahluwalia, Deputy Chairman of Planning Commission said that the RBI’s credit policy came on expected lines.
"It is a good signal but many other things also need to happen in during the course of the year. It indicates that RBI is satisfied that the inflationary pressures are not the only thing to worry about. RBI Governor is indicating that the economy is ready for a stimulus with out worrying about inflation. I would like inflation to come down a little bit," he added.
Falling manufacturing output and slow growth has pushed Reserve Bank of India to cut benchmark rates that could reduce cost of borrowing for corporates and individuals.
Bankers are likely to pass on the 0.50 per cent cut to borrowers. So home loans, car loans, personal loans could get cheaper to that extent.
A poll of bankers conducted by NDTV Profit showed that 70% respondents were confident of a 25 basis point cut in the repo rate, while 60% felt that RBI will leave CRR untouched.
Tough economic environment
*The RBI move comes in the backdrop of some difficult circumstances where economic recovery is likely to be slow and inflation continues to remain high.
*Releasing the macroeconomic report on Monday, the central bank cut its gross domestic report estimate for fiscal 2012-13 to 7.2%, adding that growth, which would improve moderately, must be in a non-inflationary manner. It warned that growth may have bottomed out in the third quarter of 2011-12, and that the recovery ahead was likely to be slow.
* Inflation fell marginally to 6.89% in March from 6.95% in February. Headline inflation, as measured by the Wholesale Price Index, was higher than the 6.6% estimated by an NDTV Profit poll of experts.
* Food inflation, which had been hovering just above the 6% mark in February, surged to 9.94%.
*The RBI report also said that oil prices and a weak rupee posed inflationary risks, and warned that inflation could remain sticky in the current fiscal, calling for a policy that would not exacerbate inflation.
* So inflation and growth, along with a high credit deposit ratio and high government borrowing, could have been reasons enough for Governor Subbarao to leave the policy rate untouched.
* The central bank noted in its report that its two-stage 125 basis point cut in cash reserve ratio (CRR) had eased liquidity pressure. CRR is the portion of deposits that banks must keep with the RBI. One basis point is one-hundredth of a percentage point.
*Credit deposit ratio, or the ratio of the total outstanding credit in the banking system and the deposits held by them, stood at 78.1% in March, rising due to declining deposit growth.
* Government borrowing, too, has not been helping the central bank’s cause. The government plans to meet 65% of its full-year borrowing target in six months, clearly indicating that it has no plans to cut expenditure.
* To add to that the fall in the rupee hurts RBI’s ability to rapidly cut rates to stimulate growth. While RBI injected liquidity through open market operations or OMO by buying government bonds from banks, it had to buy rupees to sell dollars. That neutralized the impact of the OMO, a tool used by central banks to inject liquidity in the banking system.
Source:http://profit.ndtv.com/News/Article/reserve-bank-of-india-cuts-policy-rate-by-0-50--302085?pfrom=home-lateststories
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