REPO, REVERSE REPO SLASHED
Signalling a further cut in home, auto and other loan rates, the RBI on 4th March, 2009 slashed the rates at which it lends and borrows short-term funds from banks by half a per cent. RBI cut Repo (overnight lending rate) by 50 basis points to 5 per cent and Reverse Repo (overnight borrowing rate) identically to 3.5 per cent with immediate effect.
The decision, RBI said, "will further encourage banks to provide credit for productive purposes at viable interest rates. Bankers said rates would come down in the days to come. The decisions will reduce the borrowing costs of banks, who have been citing high cost of funds as a key handicap for not passing on the full benefit to customers.
The Reserve Bank has cited global developments for this decission. The central bank, in a detailed note explaining the new measures, has said since the third quarter review on January 27, the global financial and economic conditions have deteriorated further.
"The fourth quarter real GDP numbers of several advanced economies have turned out to be worse than expected. The uncertainty on global recovery has increased," the RBI statement said. It said the US real GDP contracted sharply at an annualised rate of 6.2 per cent in the fourth quarter of 2008 while the unemployment rate there moved up to 7.6 per cent. The real GDP in the euro area also declined by 1.5 per cent in the fourth quarter of 2008. Reflecting deteriorating global demand, Japanese exports fell by 45.7 per cent in January and the Japanese economy, the world's second largest, contracted sharply by 3.3 per cent in the fourth quarter of 2008. RBI pointed out that by way of response, the governments all over the world continue to unveil expansionary fiscal policies.
21 times - A New Record
Creating a record of sorts in terms of altering its key rates or ratios during a single fiscal, Reserve Bank today effected the 21st such decision of this financial year.This includes 13 monetary actions of an increase in key rates or ratios through April-September -- which sucked up more than Rs 1,00,000 crore worth liquidity from the banking system in order to control inflation. This was followed by eight instances of rate or ratio cuts that injected close to Rs 4,00,000 crore into the system to stimulate consumer spending to keep the economy ticking. This is the fifth cut in repo (overnight lending rate) since October 2008, while the reverse repo rate has now been slashed three times since early December. Besides, the RBI has slashed its cash reserve ratio -- the mandatory deposits banks need to keep with it -- four times since the third quarter of the current fiscal.
Prior to embarking upon a rate-cut spree in September 2008 to stimulate the economy fighting a global downturn, the RBI had been hiking its key rates and ratios to tackle the surging inflation. The first monetary action of RBI in the current fiscal came into effect on April 14, when RBI raised the CRR by 25 basis points to 6.25 per cent. With as many as 10 hikes through August 2008, the CRR rose to a high of nine per cent, after which the RBI started slashing this ratio, bringing it to the current level of 5 per cent.
Besides, the reverse repo rate stood at 6 per cent at the beginning of this fiscal, which has now come down to 3.5 per cent through three cuts. The repo rate started the fiscal at 7.75 per cent and was hiked to 9 per cent with three hikes through October 2008. Thereafter, RBI has announced five cuts in it, bringing it to current level of 5 per cent.