The Reserve Bank of India (RBI) today cut key rates by 50 basis points but left the Cash Reserve Ratio untouched at 4.75 per cent in its Mid Quarter Review of Monetary Policy 2012-13.
Announcing the Monetary Policy, RBI Governor D Subbarao said the Repo rate was being cut by 50 basis points with immediate effect,under the liquidity adjustment facility (LAF), to 8 per cent which will automatically see the Reverse Repo rate drop to 7 per cent from 7.5 per cent.
The Bank Rate stands adjusted to 9.0 per cent with immediate effect. The cash reserve ratio (CRR) of scheduled banks has been retained at 4.75 per cent.
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 a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist.
These considerations inherently limit the space for further reduction in policy rates, Dr Subbarao said.
The Reserve Bank of India for the first time in three years, resorted to a rate reversal cycle. After hiking policy rates for 13 consecutive times between March 2010 and October 2011, the regulator took a pause in January 2012 to support India’s falling growth momentum.
The cut in the repo rate is an indication that banks could reduce the interest rates on home and car loans.
A cut in these rates also eases money supply in the system by making it more attractive for commercial banks not to park their funds with RBI in form of government securities and instead lend it for commercial purpose.
On April 21, 2009, the RBI had last reduced its key policy rates by 25 basis points. But, it cut the CRR by 125 bps so far in 2012 to ease the tight liquidity situation.
The latest rate cut move came in line with market expectations.
The RBI has abolished the pre-payment penalty on home loan is another good news for the consumers.
It warned that India’s current account deficit, which widened to 4.3 percent of GDP in the December quarter, is “unsustainable” and will be difficult to finance given projections of lower capital flows to emerging markets in 2012.