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RBI Bowls, Banks to Bat

Raghuram Rajan unveiled a host of measures to smoothen liquidity supply so that banks can lend to productive sectors

Published: 06th April 2016 05:15 AM  |   Last Updated: 06th April 2016 10:04 AM   |  A+A-

NEW DELHI: Reserve Bank of India (RBI) Governor Raghuram Rajan on Tuesday reduced the short-term lending rate (repo rate) by 0.25 per cent at 6.5 per cent, which could trigger a minor reduction in payment of equated monthly installments (EMIs) by banks, for loans taken by the retail and corporate customers.

Repo rate is the rate of interest at which banks borrow from RBI.

RBI.jpgHowever, traditionally banks have been unable to pass on the full benefits to the consumers. For example, last year when RBI had cut the repo rate by 1.25 percentage points, banks reduced their lending rates only by 0.70 percentage points.

Reacting to the first bi-monthly monetary policy for the current fiscal, Harshavardhan Neotia, President FICCI, said, “RBI’s decision to cut the repo rate and follow an accommodative monetary policy stance is a positive step… We now look forward to banks taking the lead in supporting the investment cycle and improving economic growth.”

The RBI kept the cash reserve ratio (CRR) unchanged at 4 per cent. CRR is the fraction of the total deposits of customers that banks are required to park with the RBI.

If the central bank decides to increase the CRR, the available amount with the banks comes down. The RBI resorts to CRR tool to drain out excess money out of the system.

Rajan, it is evident from today’s announcement, is wary of a bad monsoon and impact of seventh pay commission, both could impact inflation. RBI officials  expect that Seventh Pay Commission impact will be less compared to Sixth Pay Commission, since there are no arrears now. But it could still have a significant impact on the economy, fear economist.

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RBI stated that it expects the central pay hike implementation to hurt inflation by 1-1.5 per cent over a two year period, but added that the shock will not be as strong as that felt during the implementation of the 6th pay panel suggestions.

Rajan also said that the inflation objectives are closer to being realised and the price-rise will hover around the 5 per cent mark for the remainder of the fiscal. He reiterated that the monetary policy will continue to remain ‘accommodative to address the growth concerns’.

“Going ahead, there is a possibility of one more rate cut even though the bar has been kept high,” said Anis Chakravarty, Lead Economist and Partner, Deloitte India.

However, exporters are disappointed. “The RBI policy is another opportunity lost for reviving exports by lowering costs of borrowing significantly and providing them some relief,” said T S Bhasin, chairman of Engineering Export Promotion Council.

“Rate cut short of expectations, but liquidity injection welcome move by RBI,” said ASSOCHAM president, Sunil Kanoria.

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