RBI Cuts Repo Rate by 25 Bps, to Lower Liquidity Deficit in System

RBI to maintain an ‘accomodative stance’ on monetary policy, meaning it is open to more rate cuts in future.

• The RBI has slashed the repo rate by 25 basis points to 6.5 percent. The CRR is left unchanged.
  
• The central bank has tweaked policies with respect to liquidity. It has reduced the marginal standing facility (MSF) rate by 75 basis point from 7.75 percent to 7 percent.
  
• The RBI has also raised the reverse repo rate from 5.75 percent to 6 percent. As a result, the difference between the repo and reverse repo rates has come down from 1 percent to 0.5 percent.
  
• The central bank has reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 95 percent of the requirement to 90 percent.
  
• It has also lowered liquidity deficit in the system from 1 percent of net liabilities to near 0 percent.
  

The Reserve Bank of India (RBI) on Tuesday cut its policy repo rate by 25 basis points to bring it down to 6.50 percent at the first bi-monthly monetary policy meeting of the fiscal year.

As expected, the RBI said it would maintain an ‘accomodative stance’ on monetary policy, meaning it was open to more rate cuts in future depending on macroeconomic conditions. The Cash Reserve Ratio has been kept unchanged. Statutory Liquidity Ratio (SLR) scheduled banks, however, has been reduced by 25 basis points from 21.5 percent to 21.25 percent of NDTL.

Repo rate is the rate at which the central bank lends to banks. CRR and SLR are percentage of liabilities that banks have to hold in cash and liquid assets, respectively.

More importantly, the central bank announced steps to boost liquidity in the system which would help banks pass on the benefits of lower rates to its borrowers.

RBI has also reduced the daily maintenance of cash reserve ratio (CRR) from 95 percent of the requirement to 90 percent with effect from the fortnight beginning 16 April 2016.

RBI Tweaks Liquidity Policy

Also, it said it would lower the liquidity deficit in the system to a position ‘closer to neutrality’. The daily average liquidity deficit in the system is around Rs 1.5 lakh crore, and bringing it to near zero will free up that much funds and help lower cost of funds.

The RBI struck a cautious note on inflation, saying there were uncertainties surrounding inflation path because of unseasonal rains, and low reservoir levels. In addition, the renewed strength in commodity prices, particularly crude oil, and persistently high inflation in certain services also warranted a close watch, RBI said.

The decision comes nearly a month after the government presented its Union Budget, sticking to its fiscal consolidation targets and unveiled what analysts termed was a marked improvement in the quality of its spending.

These, along with a recent decision by the government to partially de-regulate the interest rate on key savings instruments, paved the way for the first rate cut in this financial year.