The change of the Repo rate is aimed to prompt growth and revive investment.
Consequently, the reverse repo rate under the LAF stands adjusted to 6.5 per cent from the earlier 6.75 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 8.5 per cent with immediate effect. The Cash Reserve Ratio (CRR) has been retained at 4 per cent.
It is for the second time since the start of the year RBI has cut down the repo rate in a bid to help revive flagging growth in Asia's third-largest economy. RBI has also warned that its scope for further policy easing is limited.
The RBI will continue to actively manage liquidity through various instruments, including open market operations, so as to ensure adequate flow of credit to productive sectors of the economy.
With the change in Repo rate, the Reserve Bank of India also announced infusion of 10000 crore rupees into the financial system by purchasing government securities as part of its liquidity injection measure.
The Indian economy expanded at a 25-quarter low of 4.5% in October-December 2012 quarter, and the 2.4% rise in industrial production in January 2013 after two months of contraction suggests the recovery is still weak.
The current account deficit hit a record-high 5.4 per cent in the September quarter and is expected to end the 2012/13 fiscal year at its highest level ever.
What is Repo Rate?
The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI.
A reduction in the repo rate helps banks get money at a cheaper rate and vice versa.
What is Reverse Repo rate?
Reverse Repo rate is the rate at which the RBI borrows money from commercial banks.
An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.
What is cash Reserve Ratio?
Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with the RBI. If the central bank decides to increase the CRR, the available amount with the banks comes down. The RBI uses the CRR to drain out excessive money from the system.
Highlights of the RBI Quarterly Monetary Policy Review:
• Repo rate changed to 7.5 Percent from 7.75 Percent
• CRR Remain Unchanged at 4 Percent
• Reverse repo rate changed to 6.75 percent from earlier 6.5 Percent
• Marginal standing facility (MSF) rate – 8.5 Percent
• Bank Rate to 8.5 per cent
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