Revealing the annual monetary policy for the year 2009-10, the Reserve Bank of India (RBI) Tuesday announced another round of cut in short-term lending (repo) and borrowing (reverse repo) rates by 25 basis point (bps) to motivate the banks to reduce the loan interest rates.
The apex bank has also appealed the banks to review their Benchmark Prime Lending Rate (BPLR) and informed that a committee has now been formed to review the BPLR system.
After the latest announcement of RBI, the repo rate – the rate of interest at which banks borrow money from the central bank – has come down from 3.50% to 3.25% while the reverse repo rate – the rate of interest at which banks earns interest for parking excess of money with the central bank in exchange of government securities – from 5.0% to 4.75%.
The master bank has, however, made no changes in Cash Reserve Ratio (CRR) – the slice of cash banks have to park with the Central bank – which is at 5.0%.
Since last mid-September, the Reserve Bank has cut the repo rate by 400 basis points and the reverse repo rate by 250 basis points. The CRR was also reduced by 400 basis points.
In this response, all public sector banks, most private sector banks and some foreign banks have reduced their deposit and lending rates.
The public sector banks reduced 125-250 bps in term-deposit rates between October 2008 and April 18, 2009 while in BPLR, they reduced 125-225 bps for the same period.
The private sector banks, on the other hand, reduced 75-200 bps in term-deposit, and 100-125 in BPLR.
In the trends of reduction, the foreign banks reduced 100-200 bps in term-deposit and 100 bps in BPLR.
Assuming the inflation rate up to 3% for the medium term, RBI has also projected the growth rate for fiscal year 2010 to be 6 - 6.25%, a moderation in growth as against the previous fiscal year.
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