Apr. 17 – The Reserve Bank of India cut its short-term lending rate by a greater-than-expected half a percentage point today, raising hopes of cheaper home, auto and corporate loans and sending the Bombay Stock Exchange’s benchmark Sensex to surge by 207 points.
The rate reduction down to 8.0 percent was the first time the RBI had cut the rate in three years, and was prompted by a deceleration in growth and the softening of inflation.
“The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate, which, in turn, is contributing to the moderation in core inflation,” the RBI Governor D Subbarao said. However, he ruled out any further reduction in policy rate in the immediate future citing persistent upside risks to inflation and possible fiscal slippages driven by higher oil subsidies.
The RBI forecasts India’s GDP to grow at 7.3 percent in the 2012-2013 fiscal, compared to the three year low of 6.9 percent seen in 2011-2012.
“The repo rate cut will provide the boost to investment as well as send a strong signal that turning around growth is of pivotal importance,” CII Director General Chandrajit Banerjee told the Times of India.
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RBI has to cut repo rate in April 2012 policy
The repo rate is a tool that the RBI can use to improve liquidity in the system. Lower interest rates do not directly add liquidity into the system but it can indirectly help liquidity. Banks by passing on lower interest rates to borrowers can increase demand for credit leading to a multiplier effect. The multiplier effect helps raise deposit as well as broad money growth. However lower rates work with a lag and the later the RBI postpones a repo rate cut, the later the easing of liquidity conditions.