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RBI snips repo, CRR rates by 25 basis points

The Reserve Bank of India (RBI) on Tuesday cut repo rate and CRR by 25 basis points each or 0.25 per cent for the first time in nine months to perk up slowing growth but at the same time made it clear there was no room for aggressive rate cuts in future due to concerns over inflation and the quality of current account deficit (CAD).

Accordingly, the key policy or repo rate, the rate at which banks borrow funds from the central bank, now stands reduced to 7.75 per cent from the earlier 8 per cent. Consequently, the reverse repo rate (at which banks park their surplus funds with the RBI) gets adjusted to 6.75 per cent from the earlier 7 per cent.
This will definitely lead to a cut in lending rate. Home, auto and corporate loans will also become cheaper. The central bank has also decided to inject Rs 18,000 crore liquidity into the system.

Briefing the media here, RBI Governor Duvvuri Subbarao said: “If inflation moderates further, CAD moderates further; there will be more room for monetary policy easing. But if they go along the currently expected lines, the space for monetary policy easing is quite limited.”

Reacting to this, MD & CEO of ICICI Bank, Chanda Kochhar hinted at softening of lending rate and a tad improvement in liquidity. “The RBI’s announcement is a welcome move. While the rate cut signals a monetary policy stance that is more supportive of growth, the CRR cut complements the same by seeking to address liquidity conditions and will facilitate transmission of the monetary policy stance into lending rates,” she said.

Her counterpart at Federal Bank, Shyam Srinivasan, said: “With investor sentiment slowly turning positive amidst stagnant growth, India is going through an extended slowdown in Industry and trade during the last many months. Against this background, the cut is progressive indeed. I would have preferred an even larger cut in CRR, as it could have delivered a significant multiplier effect on liquidity and could have made transmission of rates a lot easier.”

The central bank’s move needs to be put in perspective in the context of inflation and widening current account deficit, said Leif Eskesen, chief economist for India and Asean region at HSBC Bank. “The case for a rate cut was not strong given the lingering inflation pressures and wide twin deficits. Any further rate cuts on inflation risks further receding, fiscal policy tightening, and structural reform implementation continuing,” he said.

Joint MD & Group CFO at JSW Steel, Seshagiri Rao, said: “The transmission of lower interest rate to borrowers in response to cut in repo rate should take place swiftly as the banks have already reduced deposit rates for the past few months.”

Trade body Bangalore Chamber of Industry and Commerce (BCIC) welcomed the rate cuts, given that inflation is trending downwards. In a statement, BCIC president M Lakshminarayan said there is a possibility of another 25 basis points cut in March, provided inflationary pressure is contained. The president of FKCCI, K Shiva Shanmugam, termed the rate cuts a “much-needed move.”

Reacting to the cut in repo rate, IDBI Bank reduced lending and deposit rates by 0.25 per cent. In a release, the bank said: “The new base rate or minimum lending rate (at 10.25 per cent) will be effective from February 1.” It added that it is a “proactive step” keeping in view the policy measures announced by the RBI.  IDBI Bank is the first to announce rate cut.