Money & Banking

With 25 bps cut, Rajan sets stage for cheaper loans

Our Bureau Mumbai | Updated on January 20, 2018 Published on April 05, 2016

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RBI Governor opens the liquidity floodgates; ball in banks’ court now

In a widely expected move, Reserve Bank of India Governor Raghuram Rajan kicked off the new financial year cutting the repo rate by 25 basis points.

In the first bi-monthly monetary policy for 2016-17, Rajan also announced a slew of liquidity enhancement measures, including a reduction of the minimum daily maintenance of cash reserve ratio (CRR) in the banking system.

State Bank of India Managing Director Rajnish Kumar said the measures will help bring down the wholesale borrowing cost for the bank. Hence, there could be some scope for lending and deposit rate cuts.

The repo rate, which is the interest rate at which banks borrow short-term money from RBI, has been pared to 6.50 per cent from 6.75 per cent. The cut was possible as retail inflation remained along the RBI’s projected trajectory and came well within the target of 6 per cent set for January 2016.

The equity market, which was clamouring for a 50 basis point rate cut, was clearly disappointed with the monetary policy. The benchmark BSE Sensex tanked 516.06 points (2.03 per cent) to close at 24,883.59 over the previous close.

At a post-policy press meet, Rajan said: “The monetary policy stance remains accommodative. Going forward, we will be looking for further monetary room in signs of a good monsoon, further readings of low headline inflation, indications of a softening in core inflation and further evidence of a transmission of rate cuts.” Excluding today’s cut, the RBI has cut rates by 120 bps since January 2015, of which only about a half has been passed on by banks through lending rate cuts.

“The effects of the liquidity measures will help the transmission. Banks have been continuously saying it’s because of liquidity tightness that we can’t transmit. Now we have given them enough liquidity. So, my hope is you will see significantly more transmission over the next few months,” Rajan explained.

Liquidity measures

The RBI reduced the minimum daily maintenance of the CRR from 95 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight to 90 per cent with effect from April 16, even as it kept this ratio unchanged at 4 per cent of deposits.

CRR is the proportion of deposits that banks park with the RBI.

The central bank said it would continue to provide liquidity as required, but would progressively lower the average ex ante (forecast) liquidity deficit in the system from 1 per cent of deposits to a position closer to neutrality.

The policy rate corridor (reverse repo rate-repo rate-marginal standing facility corridor) has been halved to 50 basis points.

The new reverse repo rate (interest paid by the RBI to banks when they park their excess funds with it) is 6 per cent (5.75 per cent earlier). The new MSF rate (a facility where eligible entities can borrow up to 2 per cent of their respective deposits outstanding at the end of the second preceding fortnight) is 7 per cent (earlier 7.75 per cent).

Published on April 05, 2016
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