RBI cuts repo rate by 100 bps to 8 per cent
20 Oct 2008
The Reserve Bank of India (RBI) today announced a 100 basis point reduction in its key lending rate, the repo rate, from 9.0 per cent to 8.0 per cent, with immediate effect.
Finance minister P Chidambaram responded to the rate cut saying, it was consistent with the government's objective to moderate inflation and ensure satisfactory growth rate. The repo rate cut will enthuse investors to invest more, Chidambaram said.
This is the first reduction in the repo rate (the repurchase rate or the rate at which the RBI buys back government bonds from banks) since 2004.
''In order to alleviate the pressures and, in particular, to maintain financial stability, the Reserve Bank has decided to reduce the repo rate under the Liquidity Adjustment Facility (LAF) by 100 basis points to 8.0 per cent with immediate effect, the RBI release said.
''The global financial situation continues to be uncertain and unsettled. Even as countries directly affected by the turmoil have taken aggressive action to manage the crisis, confidence and calm is yet to be fully restored in the financial markets. Due to financial integration, this uncertainty is transmitting also to countries outside the epicenter of the crisis,'' the release noted.
''India too is experiencing the indirect impact of the global liquidity constraint as reflected by some signs of strain in our credit markets in recent weeks,'' the release added
The Reserve Bank has taken a number of measures over the last one month to augment cash flows from both within and outside.
''The Reserve Bank has been and will continue to monitor the impact of global developments on our financial markets and on our liquidity conditions and will take action as appropriate,'' the release added.
RBI had slashed banks' Cash Reserve Ratio (CRR) by 250 basis points – from 9.0 per cent to 6.5 per cent - with effect from 11 October, releasing Rs60,000 crore into the system.
The RBI also reduced the Statutory Liquidity (SLR) temporarily to 23.5 per cent of their deposits in government bonds, instead of 25 per cent, required under the banking law.
Besides, the RBI also allowed banks to raise the interest rates on non-resident Indian (NRI) deposits by 100 basis points to attract funds from overseas at a time when foreign institutional investors (FIIs) are pulling out of Indian equities to send money home.
Besides the central bank had announced immediate release of Rs25,000 crore to banks as compensation for farm loan waivers.
The RBI also conducted 14-day additional repo facility to boost liquidity and to help mutual funds meet redumption pressure.
These measures together are expected to have injected over Rs175,000 crore into the financial system.
RBI said it is planning Special Market Operations (SMO) for public sector oil marketing companies similar to the one in June-July 2008 when oil bonds become available.
The Reserve Bank said it will continue to monitor the impact of global developments on the domestic financial markets and on the liquidity conditions and will take action as appropriate.
