RBI cuts rate to 5-yr low

Home loans and other borrowings are set to get cheaper by at least half a percentage point in the coming months following Reserve Bank of India governor Raghuram Rajan's decision to cut rates by 25 basis points to 6.50%--an over-five-year low. I
Following the policy , the repo rate--the rate at which RBI lends to banks--has come down to 6.5% from 6.75% earlier, pretty much in line with market expectations.The surprise was the host of measures announced by the governor to improve liquidity. Stock markets, however, fell as the rate cut was widely anticipated and traders booked profits. The 30-scrip sensex, which had closed on Monday at 25,400 points ended Tuesday at 24,884--down 516 points or 2.03%.
Announcing the first rate cut for the year, Rajan said that food inflation eased for the first time in the second half of 2015-16. This occurred on a decline in prices rather than favourable base effect, which were at work in the first half of the year. Similarly, fuel prices have also eased.
On April 1,most banks reduced their lending rates in the course of switching to a new benchmark--the marginal cost of lending rate (MCLR). Unlike the earlier benchmark--the base rate which was reviewed quarterly--the MCLR, which is a rate derived out of incremental cost of deposits, is reviewed every month. Bankers say that with a fall in deposit rates the MCLR too would fall automatically .
Reduction in deposit rates would depend on how soon liquidity conditions improve.Besides cutting rates, Rajan said that he would infuse liquidity to ensure that shortage of short-term money--which is around one per cent of bank deposits of Rs 93 lakh crore--would vanish.
At present, because of the liquidity deficit, banks borrow around Rs 80,000 crore every day . This increases their cost of funds and prevents them from reducing deposit rates. The governor narrowed the policy rate corridor to 0.50% from the earlier one percentage point, which resulted in the reverse repo rate--the rate at which banks park surplus funds with RBI--at 6%. He also reduced the daily requirement for maintaining cash reserve ratio to 90% of the statutory requirement from 95% earlier. CRR is the portion of bank deposits that has to be mandatorily parked with RBI. What this means is that while CRR continues to be at 4%, banks will need to borrow less as they were earlier overborrowing to meet the CRR requirement fearing a default.
Given the tone of the RBI's statement, bankers expect more rate cuts to come.
On inflation projections, Rajan said going forward, consumer price inflation is expected to decelerate modestly and remain around 5% during 2016-17. On growth, the governor has retained the 7.6% growth target set by the government stating that the adherence to fiscal consolidation will support the disinflation process.