On December 6th, the Reserve Bank of India announced a set of monetary measures whereby both its short-term policy rates -repo rate and reverse repo rate - were cut by 100 basis points.
Repo rate, the short term lending rate at which RBI injects liquidity into the system has been cut to 6.5% from 7.5%. This has been the third cut since October and now repo rate is seen at a level that was last observed in January 2006. On the other hand the reverse repo rate at which RBI sucks liquidity from the system has been slashed to 6% from 5%. Although both rates have been declined by an identical margin of 100 basis points but a gap of 150 basis points still persists between them.
Governor of RBI, D. Subbarao said, "The reduction in repo and reverse repo rate should result in a reduction in marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms."
"The repo rate adjustment we did over the last few months and the repo rate adjustment and reverse repo rate adjustment done today are intended not so much for liquidity management, but to signal the final lending rates for banks, and we hope that they will take the signal," added Mr. Subbarao.
However the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) have remained untouched at 5.5% and 24% respectively.
Besides, RBI has also announced some refinance measures to ease liquidity to the real estate and non-banking finance companies. A credit line of Rs4,000 crore is being granted to the apex mortgage regulator, the National Housing Bank (NHB). Managing director at Housing Development Finance Corp Keki Mistry said, "The recent RBI moves are extremely positive. Though a repo rate cut doesn't lower the cost of funds, we as end users, will stand to benefit as we expect the banks to reduce their lending rates."
RBI will also extend Rs7,000 crore to the Small Industries Development Bank of India (SIDBI) to meet the credit needs of the SME segment.
Mr. Subbarao has been easing monetary policy since October in order to pump liquidity into the system. He is expected to cut the repo rate further in January when RBI announces its quarterly monetary policy.