In a widely expected move, the Reserve Bank of India has slashed the policy interest rate or the repo rate by 25 basis points (bps) from 7.5 per cent to 7.25 per cent with immediate effect. The move is aimed at putting the recovering economy on a firmer footing, say analysts.
However, RBI Governor Raghuram Rajan chose to leave the cash reserve ratio (CRR)—the quantum of funds commercial banks have to keep in the form of cash or government bonds—unchanged at 4 per cent of deposits.
Both bankers and industry leaders were expecting the central bank to lower its key policy rates to support economic activity and boost investment as inflation and fiscal deficit are under control. “The reverse repo rate under LAF stands adjusted to 6.25%, and marginal standing facility (MSF) rate and the Bank Rate to 8.25%,” the RBI Governor said in a press statement.
Reduction in the repo rate is likely to have a positive impact on both existing and new loans, especially the home loan, as the EMIs will now work out a little lower.
The wholesale price index based inflation hit a new low of (-)2.65 per cent in April, as deflationary pressures continued for the sixth month. Even retail inflation is on the downswing. Industry leaders and bankers also take comfort from the fact that the government has been able to rein in fiscal deficit within 4 per cent of GDP in 2014-15, providing headroom for the RBI to soften up.
RBI Governor Raghuram Rajan has snipped the repo rate twice earlier this year, in January and March, by 0.25 per cent each, but left it unchanged at the bi-monthly monetary policy review on April 7.