The Reserve Bank of India (RBI) on Tuesday brought festive cheer to the markets with a surprise 50 basis points reduction in its benchmark repo rate to 6.75 per cent in an effort to boost economic growth.
The central bank’s rate cut is expected to give more elbow room for the banks to cut lending rates in the festive season, which is likely to spur demand in the economy. State Bank of India, the country’s largest lender, promptly >announced a reduction in its base lending rate , making loans taken by home buyers, among others, cheaper.
In its fourth bi-monthly monetary policy on Tuesday, the RBI kept the Cash Reserve Ratio (CRR), the portion of deposits which banks have to hold as reserve, unchanged at 4 per cent. The repo rate is the rate at which banks borrow funds from the central bank. Front-loading the policy action by a reduction of 50 basis points, RBI Governor Dr. Raghuram Rajan said that “investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow.”
While markets have transmitted the RBI’s past policy actions via commercial paper and corporate bonds, Dr. Rajan said “banks have done so only to a limited extent.”
The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reductions during January-June, even after a passage of eight months since the first rate action by the RBI. However, he said, bank deposit rates have been reduced significantly, suggesting that further transmission is possible.
While the RBI’s stance will continue to be accommodative, Dr. Rajan said, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed.
“Global growth has moderated, especially in emerging market economies, global trade has deteriorated further and downside risks to growth have increased,” he said at a press conference.
