For the first time in nine months, the Reserve Bank of India on Tuesday cut the indicative policy rate (repo) by 25 percentage points, from 8 per cent to 7.75 per cent, and the Cash Reserve Ratio (CRR) by 25 percentage points, from 4.25 per cent 4 per cent.
The step is likely to benefit retail borrowers, as lending rates are likely to come down. After meeting RBI Governor D. Subbarao, bankers said they would pass on the benefit to borrowers.
The RBI first cut the repo rate in the current fiscal in April 2012, with a reduction of 50 percentage points, from 8.5 per cent to 8 per cent. It reduced the CRR from a peak of 6 per cent to 4.25 till mid-December 2012.
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Repo is the rate at which banks borrow funds from the central bank. CRR is the portion of deposits banks must keep with the RBI.
In its third quarter review, Dr. Subbarao said: “While the series of recent policy initiatives by the government has boosted market sentiment, it will take some time to reverse the investment slowdown and reinvigorate growth.”
The RBI has scaled down the projection for GDP growth for the current year, from 5.8 per cent to 5.5 per cent, and for the wholesale price inflation in March 2013, from 7.5 per cent to 6.8 per cent.
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“This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks,” Dr. Subbarao said.
However, the RBI has warned that retail inflation is still at a higher level.