Friday, January 2, 2009

RBI cuts key rates to stimulate economy

The Reserve Bank of India on Friday cut key policy rates. The repo and the reserve repo rate under the liquidity adjustment facility (LAF) has been cut by 100 basis points while cash reserve ratio (CRR) has been reduced by 50 bps.

Following this move, reverse repo stands at 4%, repo stands at 5.5% and CRR now stands at 5%. The cut in CRR will infuse Rs 20,000 crore in the system.

The market had widely expected RBI to cut the key lending rates. The cut in repo and reserve repo is with immediate effect while CRR cut will be effective from fortnight beginning January 17. Since August RBI cut CRR by 450 basis.

Repo rate is the rate at which banks borrow from RBI while the reverse repo is the rate which RBI gives banks for parking their surplus funds. These two rates are seen as the floor and the cap for daily call money movement.

The decisions would among other things infuse Rs 20,000 crore into the banking system.

Both reductions are effective immediately. The repo rate has been cut aggressively since mid-October last year as the central bank tried to minimise the knock-on effects of the global financial crisis.
The Economic Times

Equities to respond positively to fiscal and monetary measures

Indian equities on Monday are expected to positive cues from the combination of fiscal and monetary measures that are aimed at stemming a slowdown in the Indian economy.

Fund managers said while there are no major surprises in the fiscal stimulus package, the extent of measures used by the Reserve Bank of India to ease money supply in the banking system have been higher-than-expected.

Analysts said the CRR cut has come as a surprise, while the extent of repo rate cut has been has been higher than anticipated.

These measures are aimed at making loans cheaper and revive consumer borrowing in an economy that has been affected by a recession in major global economies.
The Economic Times

Related Story:

India Cuts Rates, Unveils Stimulus Package

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