RBI cuts repo rate by 100 bps

The Reserve Bank of India (RBI) today lowered the repo rate, or the rate at which it lends to banks, by 100 basis points to 8 per cent.

The reduction, the first since 2004, is effective immediately, RBI said. A reduction repo rate will lower the cost of funds for banks.

The central bank said India is also experiencing the indirect impact of the global liquidity constraint as reflected by some signs of strain in the credit markets in recent weeks.

“The global financial situation continues to be uncertain and unsettled. Even as countries directly affected by the turmoil have taken aggressive action to manage the crisis, confidence and calm is yet to be fully restored in the financial markets. Due to financial integration, this uncertainty is transmitting also to countries outside the epicenter of the crisis,” RBI said in a statement.

The move comes four days before RBI unveils its mid-term review of the annual policy statement. In addition, the liquidity adjustment and injection committee headed by Finance Secretary Arun Ramanathan is expected to submit its interim report this week.

Effective October 11, the cash reserve ratio or the proportion of deposits that banks set aside, has been lowered 250 basis points to 6.50 per cent to inject around Rs 100,000 crore liquidity into the system. Further, a special window has been opened to allow banks to access up to Rs 25,000 crore from RBI against their farm debt relief arrears.

In RBI’s first liquidity adjustment facility session today, there were no bids from banks to borrow funds through the repo window.

Thanks to the RBI’s steps the liquidity conditions in the markets have eased a little with the weighted average call rate, according to data on the Clearing Corporation of India website, at 6.80 per cent. Call rates had touched 23 per cent on October 10 and banks have been wary of lending in recent weeks.

“The Reserve Bank has been and will continue to monitor the impact of global developments on our financial markets and on our liquidity conditions and will take action as appropriate,” the statement said.