RBI cuts key policy rates by 50 basis points to boost economy
In yet another signal to banks for reduction in home, auto and other loan rates, the RBI on Wednesday slashed the rates at which it short term lending and borrowing rates.
RBI cut Repo (the rate at which it lends to banks) by 50 basis points to 5 per cent and Reverse Repo (the rate at which it sucks liquidity from market) to 3.5 per cent with immediate effect.
The decision, RBI said, "will further encourage banks to provide credit for productive purposes at viable interest rates. Bankers said rates would come down in the days to come.
The decisions will reduce the borrowing costs of banks, which have been citing high cost of funds as a key handicap for not passing on the full benefit to customers.
"It is a welcome move. This has given a window for banks to cut down rates but how soon and how much has to be decided by bankers individually," said CMD of a public sector bank.
This is the fifth monetary stimulus from RBI since mid-September 2008 to stimulate consumer spending, in addition to three fiscal packages announced by the government since December. Announcement of poll dates has operationalised the model code of conduct that restricts policy changes from the outgoing government leaving the RBI to tackle the economic slowdown.
Finance Minister Pranab Muhkerjee, after announcing the third stimulus package in Lok Sabha last month, had said that it was now the turn of RBI to take measures to stimulate the economy.
The decision to reduce key rates follows a review of the current global and domestic macro-economic situation, the RBI said.
Even though banks have cut lending rates in response to RBI's policy stance, the central bank said in a statement that "concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth."
RBI noted that the impact of the global financial crisis turned out to be "deeper and wider" than anticipated earlier, the central bank said that banks should ensure that creditworthy enterprises should continue to get funding.
The central bank's decision comes after industrial production fall, for the second time this fiscal, to two per cent in December and exports contracted 16 per cent in January.
"The services sector, which has been the main engine of growth during the last several years, has been slowing down. Business confidence has been dented significantly and investment demand has decelerated," the Reserve Bank said.
The total flow of resources to the commercial sector from banks and non-bank sources as of 19th February this fiscal shrank by almost Rs 1,00,000 crore.
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