RBI slashes repo rate by 50 bps

New Delhi: The Reserve bank of India (RBI) on Tuesday has slashed its short-term lending rate by 50 basis points but at the same time made personal and commercial credit cheap.

Stakeholders expected a 25-basis-point cut.

While the repurchase rate, or the interest charged on short-term borrowings, stands cut to 6.75 percent, it will take commercial banks to lower their own lending rates for personal, automobile, housing and commercial loans to also get reduced, translating into lower EMIs.

The indexed reverse repo rate, or the interest payable by the central bank on short-term deposit, automatically stood reduced to 5.75 percent. There was no cut in the 4 percent cash reserve ratio that banks have to maintain in the form of liquid assets and designated government securities.

“Markets have transmitted Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent,” Reserve Bank Governor Raghuram Rajan said in the fourth bi-monthly monetary policy statement for the current fiscal year.

“Median base lending rates of banks have fallen by only about 30 basis points, despite extremely easy liquidity conditions,” the governor said.

“This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank. Bank deposit rates have, however, been reduced significantly, suggesting further transmission is possible.”

Apart from this, Mr. Rajan has also made some significant announcements:

  • The limits for foreign funds’ investment in central government securities will be increased in phases to 5 percent of the outstanding stock by March 2018
  • Additional room for investment of Rs.1,200 billion, over and above the existing limit of Rs.1,535 billion
  • Indian corporates will be permitted to issue rupee-denominated bonds with a minimum maturity of five years in overseas locations within the ceiling of foreign investment permitted in corporate debt — set at $51 billion at present