RBI cuts repo, reverse repo rates by 25 bps each

As part of its Annual Policy Statement for the financial year 2009-10, the Reserve Bank of India (RBI) today cut repo and reverse repo rates by 25 basis points (0.25%) each. The repo is the rate at which the RBI lends to banks while the reverse repo is the opposite. Post the cut, the repo rate now stands at 4.75% while the reverse repo rate stands at 3.25%. The bank regulator decided to leave the cash reserve ratio (CRR) unchanged.

“Like all emerging economies, India too has been impacted by the crisis, and by much more than what was expected earlier. The extent of impact has caused dismay, mainly on two grounds: first, because our financial sector remains healthy, has had no direct exposure to tainted assets and its off-balance sheet activities have been limited; and second, because India’s merchandise exports, at less than 15% of the GDP, are relatively modest,” the RBI, in a statement, said. “Despite these mitigating factors, the impact of the crisis on India evidences the force of globalisation as also India’s growing two-way trade in goods and services and financial integration with the rest of the world.”

On the basis of the above overall assessment, the stance of monetary policy in 2009-10 will be to ensure a policy regime that will enable credit expansion at viable rates while preserving credit quality so as to support the return of the economy to a high growth path, the RBI said. “We will also continuously monitor the global and domestic conditions and respond swiftly and effectively through policy adjustments as warranted so as to minimise the impact of adverse developments and reinforce the impact of positive developments.”

Ahead of the credit policy, experts were deeply divided on whether the RBI would use rate cut action to boost demand and push interest rates further down with some thinking the bank regulator would use rate cuts — the last-remaining weapon in the government’s arsenal — for a later date, after the country’s fiscal situation limits any stimulus action on that front.

Highlights of the policy:

- Accounting method of savings bank interest rate to be changed from Apr 2010

- Interest payment on saving bank accounts to be calculated daily product basis

- Working group to suggest changes for basic prime lending rates (BPLR) system

- Working group on BPLR system to submit report end August

- To launch exchange traded rate futures contract soon

- Extends special refinance facility to banks till March 2010

- Extends special 14-day repo facility to banks till March 2010

- To conduct special 14-day term repo weekly basis

- RBI to announce first quarter review of monetary policy on Jul 28