The Reserve Bank has come out with a 25 bps cut in repo, in its latest monetary policy revision. Governor Raghuram Rajan has made a minimal response to the prevailing positive GDP data and helpful price situation. The RBI could not get a better situation to come out with a more active support.
The 25 bps cut is has been read by the market as a minimum intervention and the Sensex fell by 400 points reacting to repo cut by the RBI.
The current policy rate cut is the third one made by the RBI during this year. Repo, which is the short term policy interest rate was 8 per cent at the beginning of this year and now placed at 7.25 % after the third rate cut intervention by Raghuram Rajan.
Corresponding to the repo rate cut, the other rates- reverse repo and marginal standing facility rates also will come down by 25 bps.
The weight of the present measure though marginal may tempt interest rate cut by bankers. It is up to the banks to make an interest rate cut decision into their lending rates. In this, the cumulative effects of the two previous rate cuts may encourage banks to reduce their base rates by at least 25 basis points.
With slowing prices, there will not be much difficulty for banks to extend credit at the same time retaining savers. Declining inflation provides enough cover for households to be with bank deposits.
With this policy rate cut, the RBI has joined other central bankers including the People’s Bank of China to support the economy in the context of declining prices and weakening demand. The Chinese Central Bank has made its third policy rate cut for the year on May 11.
There is no change in the liquidity facilities as well. The RBI has kept intact the various liquidity facilities including the overnight repo and 14 day term repo facilities at 0.25 (bankwise) and 0.75% of the banking system’s NDTL.