RBI Cuts Policy Rates And CRR To Enable Banks To Provide Credit At Cheaper Rates Meanwhile, Govt Announced The 2nd Stimulus Package.

RBI cut Repo rate, Reverse Repo by 100 bps to 5.5% and 4% respectively on the other side, there is reduction of 50 bps on CRR to 5%. CRR cut to release Rs. 20,000.00 Crores ($4.08 billion) on the other side, Govt has announced the second stimulus package to defend the economy from the global downturn. Click here to read the latest RBI Action on Policy Rates.

Reserve Bank of IndiaAs the global financial situation is continue to exacerbate and the official announcement of Recession by the advanced economies like the United States, Japan and the Euro Zone; the Reserve Bank of India (India’s Central Bank) is aggressively responding to the crisis to maintain the sound banking system via adequate amount of liquidity and sustainable economic growth to achieve targets. on 2nd Jan 2009, RBI has cut Repo rate and Reverse Repo rate by 1 percentage point to 5.5% and 4% respectively and Cash Reserve Ratio (CRR) by 50 bps to 5%. Now, its assume that the reduction in policy rates and CRR of central bank would make possible for the banks to cut their lending rates in order to provide cheaper credit.  On the same day, Deputy Chairman of Planning Commission, Mr. Montek Singh Ahluwalia has also announced the second stimulus package to the Indian Economy to weather the global financial crises with success. The second stimulus package would allow the companies to borrow more from abroad through ECB and FIIs to invest more in the country. This package also gave attention to the Housing sector and Infrastructure sector by providing liquidity of Rs. 25,000.00 Crores ($5.21 billion) through investment grade papers. In order to encourage infrastructure projects in the country, Govt has allowed the India Infrastructure Finance Company (IIFC) to raise upto Rs. 10,000.00 Crores ($2.08 billion) through tax free bonds for refinancing the bank lending of longer maturity to eligible infrastructure bid based Public Private Partnership (PPP) projects. This will mainly enables to fund the projects like Highway and Port projects.

Apart from that, to protect the Micro, Small and Medium Entreprises (MSME) from the economic downturn, guarantee cover under Credit Guarantee Scheme have been extended from Rs. 50 Lakhs to Rs. 1 Crores with a guarantee cover of 50%.

VMW Definitions:

  • Repo Rate: is a rate at which, RBI repurchases Govt Securities from the commercial banks to expand the money supply in exchange of cash.
  • Reverse Repo Rate: Vice versa of Repo rate means to sell Gov’t bonds in exchange of cash.
  • CRR: is a Cash Reserve Ratio. Banks kept some portion of their deposits with the RBI at a prescribed reserve rate.
  • SLR: is the Statutory Liquidity Ratio at which banks need to kept short term securities such as Cash, Gov’t Securities, Precious Metals like Gold and Silver and other short term securities.
  • BPS: is Basis Points which should be define by One Hundredth of a one percentage point (1/100th of 1%). It is commonly used in expressing differences of interest rates.

If you need further clarifications on these Finance terms, send an email at contact@vishalmishra.com

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