- The RBI reduced its indicative policy rate, Repo Rate by 25 basis points from 8% to 7.75%.
This is likely to help banks reduce their Lending Rates. - The RBI also cut the CRR by 25 basis points from 4.25% to 4%, pumping in a liquidity of Rs.18,000Crore into the system from February 9.
CRR cut is expected to give more elbow room for banks to lend money at lower rates. - This is likely to benefit the retail borrowers immediately more than industrial sectors, where growth is subdued.
- This is the second policy rate cut in this financial year. The last one was in April 2012. Since then ballooning inflation prevented the RBI from cutting rates. Meanwhile slowing growth made RBI's job much more difficult.
- Thus the Rate cut does not mean that RBI is comfortable with the macro-economic indicators.
- The RBI Governor said this cut would provide an appropriate interest rate environment to support growth as inflation risks moderate.
He expects that investments would be encouraged thereby supporting growth. - The apex bank(RBI) revised downwards the wholesale price inflation for March-end 2013 from 7.5 % to 6.8%.
- The RBI revised downwards the GDP growth projection for the current year from 5.8% to 5.5%.
- The widening Current Account Deficit(CAD) to historically high levels, especially in the context of a large fiscal deficit and slowing growth, exposes the economy to the twin deficit risk.
- What the economy needs most of all and most urgently is new investment.
This will step up the currently flagging aggregate demand and also ease the supply constraints so that existing capacity is fully utilized and new capacity is built up. - The RBI has asked for strong and effective supply side response.
Risk aversion in the banking system stemming from concerns relating to growing non-performing assets in constraining credit flow.
Asks banks to be discerning in their loan decisions and ensure adequate credit flow to productive sectors of the economy.
Courtesy: THE HINDU
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