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RBI slashes repo rate by 25 bps

05 Apr '16
2 min read

The Reserve Bank of India (RBI) has cut its policy repo rate by an expected 25 basis points, bringing it to 6.5 per cent at the first bi-monthly monetary policy meeting of the fiscal year. The repo rate the lowest since January 2011.

It also increased the reverse repo rate by 25 basis points to 6 per cent on account of new rate corridor and kept the cash reserve ratio unchanged at 4 per cent.

Announcing the rate cut, RBI Governor Raghuram Rajan said, “"We see inflation slowing modestly and remaining around 5 per cent for fiscal year 2017 with small inter-quarter variations."

The RBI also sees an impact of the seventh pay commission on inflation, at 100-150 bps over the next two years.

The RBI retained the growth forecast of 7.6 per cent in fiscal 2017.

The RBI also announced steps to boost liquidity in the system which would help banks pass on the benefits of lower rates to its borrowers. Rajan once again pulled up banks on their reluctance to pass on the cuts. "Banks have said there is not enough liqudity, now we have given them more liquidity, banks can transmit more," he said.

Last year, the RBI had reduced the repo rate by 125 basis points (bps), but it had been frustrated by commercial banks' failure to pass on the full benefits of the reduced rate to the wider economy.

With inflation easing to 5.18 per cent in February and a central budget that kept both borrowing and spending in check, the RBI had room to make its first cut since September, thus resuming an easing cycle that was in full swing last year.

But the Bank sounded caution about uncertainties surrounding inflation path because of unseasonal rains, and low reservoir levels. (SH)

Fibre2Fashion News Desk – India

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