(SA) RBI Revised Its Monetary Policy; Reduces Repo Rate & Reverse Repo Rate.

Reserve Bank of India modifies its monetary policy. RBI Governor Duvvuri Subbarao has slashed CRR and policy rates several time since he took the charge.
 
Banks are under significant liquidity pressure and it is evident that the banks are now withdrawing money under the central bank’s Liquidity Adjustment Facility (LAF) or Repurchase Agreement (Repo). Is the RBI cogitating the another rate hike to contain inflation under the compressed liquidity situation? Find out more.
The Reserve Bank of India.

The Reserve Bank of India Headquarters in Mumbai.

On Tuesday Apr 21, 2009, India’s Central bank – Reserve Bank of India has announced its Annual Policy on Macroeconomic and Monetary Developments. RBI has slashed its policy rates by 25 bps. BPS is Basis Points which should be defined by One Hundredth of a one percentage point 1/100th of 1%.

After the reduction in policy rates, RBI’s Repo rate stands at 4.75% and Reverse Repo rate stands at 3.25%. Repo means repurchase agreement in which banks sell government securities to the RBI in exchange for cash and agrees to repurchase those securities from the RBI at a later date which is the Reverse Repo Rate. While addressing to media, RBI Governor stresses that the bank should pass-on the reduction benefits to the consumers. India has witnessed the steep fall in demand for a credit.

RBI Reference Rate As on Apr 2009

Bank Rate 6%
Repo Rate 4.75%
Reverse Repo Rate 3.25%
Cash Reserve Ratio (CRR) 5%
Statutory Liquidity Ratio (SLR) 24%
Prime Lending Rate (PLR) 13%

 

The Indian Economy has also got affected by the economic crisis in developed countries. Since mid of Sep 2008, when the major financial institutions were collapsed, the India’s central bank has reduced its policy rates and CRR by number of times and SLR by 100 bps since than to prop the Indian economy up. India’s money supply dropped to 18.4% in compare to 21.7% last year which signifies the deceleration in credit market and the capital inflows. In the last few months, Indian Rupee has depreciated by more than 18%  and likely to depreciate further due to higher risk aversion in Rupee denominated assets, acute deleveraging due to falling exports which resulted fall in corporate earnings and strong demand for US Dollar due to huge amount of selling in equity markets. However, since Mar 09, financial markets have performed better in compare to its peers and other developed markets due to attracting and cheap valuation of the India Incorporated. By taking these factors in mind, RBI is taking precise decision on a periodic basis to respond to the global financial crisis and to make a favorable economic environment. India’s external debt and national debt has reached the level of 49% to the annual gross domestic product, however the strong foreign reserves would ensure the external stability. 

This research has been Superannuated by the VMW Research Team. This research might not be applicable in today’s economic context.

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RBI Cut CRR By 100 BPS To 5.5% And Repo Rate By 50 Bps To 7.5%

In an effort to maintain the GDP growth target of 7%, the India’s central bank Reserve Bank of India (RBI) has cut repo rate by 50 bps to 7.5%, Statutory Liquidity Ratio (SLR) by 100 bps to 24% and Cash Reseve Ratio (CRR) by 100 bps. As the global economic downturn has significant impact on the India’s economic growth, RBI is actively responding to the recent economic developments. Inter-bank Call Rate has jumped to almost 20% in the last few days despite the 21st Oct, CRR and Repo Rate cut. The liquidity is continue to drying up and Mutual Funds are now demanding more cash. To maintain the banking system’s stability, RBI going to infuse Rs. 40,000 Crore ($8.03 Billion) in two phases by cutting CRR.
RBI's CRR Action
RBI’s CRR Action in Year 2008. (Source: RBI)

To maintain the balanced and sustainable economic growth, RBI also cut Repo Rate by additional 50 bps to 7.5%. This will helps the commercial banks to cut Prime Lending Rate (PLR) to lend the money to RBI’s focus area. Currently, various sectors of the Indian Economy is facing different hurdles and difficulties for raising money to fund their expansions and projects. 50 bps Cut in Repo Rate will ensure some stability in the economy and of course the Indian Economy also not insulated from the global economic downturn, from my viewpoint, the RBI’s recent move is commendable and going forward it will definitely work.

Please checkout the latest RBI Rate cut dated: 6th of Dec, 2008. Click here.

VMW Definitions: Repo rate is a rate at which, RBI repurchases or sold Govt Securities from the commercial banks to expand/decrease the money supply in exchange of cash, while the CRR is a reserve ratio. Banks kept some portion of their deposits with the RBI at a prescribed reserve rate. SLR on the other hand is the statutory liquidity ratio at which banks need to kept short term securities such as Cash, Govt Securities, Precious Metals like Gold and Silver and other short term securities. For more information on these terms and news, send an email at vishalmishraweb@yahoo.com