RBI reduced the Repo Rate (the rate at which RBI lends money to commercial banks), to 7.25% from 7.5% while keeping the CRR (Cash Reserve Ratio- the portion of deposits that banks require to maintain with RBI) unchanged at 4%.
Monetary Measures
- Repo rate: reduction by 25 bps from 7.5% to 7.25%
- Reverse repo rate: 6.25% (100 bps below repo rate)
- MSF (Marginal Standing facility) rate: 8.25% (100 bps above repo rate)
- Bank rate: 8.25%
- Cash reserve ratio retained at 4% of NDTL (Net Demand and Time Liabilities)
Impact of repo rate cut:
- Reduced cost of overnight borrowing for commercial banks from RBI.
- Lead to reduced lending rates, helping in better macroeconomic sentiments.
- RBI has invoked banks to pass the impact of above to end users as banks hold to factor the benefit.
Why a Need of reduction in repo rate ?
- In order to continue to address risk towards growth.
- Insistence by Government and industry to lower borrowing costs to spur economic growth, estimated to have slumped to 5% in the year ended March 31, 2013.
- Guard against the risks of inflation pressures re-emerging and adversely affecting inflation expectations.
- Manage liquidity to ensure adequate credit flow to the productive sectors of the economy.