The Rudiments of RBI lowering the REPO Rate

RBI reduced the repo rate, or the rate at which it infuses money into the financial system, by 100 basis points to 8% in an effort to lower borrowing costs and ease a credit crunch. One basis point is one-hundredth of a percentage point. In a liquidity-surplus situation, the reverse repo is the policy rate, but when liquidity dries up, the repo becomes the policy rate. The Repo rate is the rate at which RBI lends short term loans to Banks. Further, RBI cancelled a Rs10,000 crore bond auction to maintain liquidity in the system. This auction is usually done in order to suck liquidity from the system.

RBI resorted to Repo cut post freeing up INR 1 trillion by cutting banks’ cash reserve ratio (CRR), or the proportion of deposits that commercial banks need to park with RBI . The Reserve Bank of India (RBI) its key policy rate for the first time in five years as it attempted to boost investment and stoke slowing economic growth. Companies, individuals won’t immediately benefit because banks may take some time to lower borrowing costs.

What does a cut in Repo rate signal?

The euphoria of sky rocketing lending rates in call money markets will ease. Further, the banks will be willing to provide short term loans to companies in the ensuing days. My phone was ever vigilant with customers querying the availability of short term funds as many Banks especially PSB’s and some foreign Banks were un willing even to provide quotes for short term loans. The days ahead will be better for all these Banks and companies as their operational bottle necks would be unlocked.

The Borrowing costs for the companies & individuals especially Home loans taken on floating rate basis might see 25 to 50 bps down side

The next big thing in the Indian financial markets is the Credit policy due on October 24 which the industry expects to be more accommodative and positive for the Business fraternity in specific and economy in general.

Let’s hope for the best.

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