The Reserve Bank of India (RBI) reduced the indicative policy (Repo) rate by 50 basis points from 8.5 per cent to 8 per cent signalling banks to reduce lending rates.

Consequent to hiking the repo rate, the reverse repo rate — determined with a spread of 100 basis points below the repo rate — gets calibrated to 7 per cent. Similarly, the marginal standing facility (MSF) rate — which has a spread of 100 basis points above the repo rate — stands adjusted to 9 per cent.

Repo rate is the rate at which banks borrow money from the central bank and the reverse repo is the rate at which banks park their funds with the RBI.

The RBI has given importance to three aspects to shape up its policy stance for the current financial year: first, to adjust the policy rates to levels consistent with the current growth moderation; second, to guard against risks of demand-led inflationary pressures re-emerging; and third, to provide greater liquidity cushion to the financial system.

“If subsidies are not contained as indicated in the Union Budget last month, demand pressures will persist, and will further reduce whatever space there is for monetary easing,” said RBI Governor D. Subbarao, while addressing a press conference after meeting bankers as part of the Annual Monetary Policy announcement for the year 2012-13.

“Food articles inflation continues to be high. Significantly, inflation in protein items is in double digits, reflecting persistent structural demand-supply imbalances in protein foods,” said Dr. Subbarao, adding, “Food inflation is likely to remain under pressure.”

Even though global crude oil prices rose sharply, in India fuel inflation moderated from over 15 per cent in November-December 2011 to 10.4 per cent in March 2012, the RBI said.

“This reflects the absence of a commensurate pass-through to domestic consumers …… a major risk to our growth and inflation projections stems from the outlook for global commodity prices, especially of crude oil,” it added.

The Governor said that any slippage in the fiscal deficit would have implications for inflation in the current financial year, too.

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