The cut in repo rate, measures to enhance liquidity in the banking system and the new methodology to calculate lending rates will give banks a freer hand in transmitting the reduction in interest rates faster, Reserve Bank of India (RBI) governor Raghuram Rajan said on Tuesday.
Apart from the 0.25 percentage point reduction in repo rate, the RBI on Tuesday also brought down the minimum daily maintenance of the cash reserve ratio (CRR) from 95% of the requirement to 90% with effect from the fortnight beginning April 16, 2016. The CRR was unchanged at 4%.
Repo is the rate at which banks borrow from the central bank. A cut in the repo rate leads to lower cost of funds for banks. If banks pass on this cost, it will mean cheaper home, auto and corporate loans for borrowers.
“The comprehensive approach towards systemic liquidity that the governor has articulated is very positive. This should support transmission of RBI’s accommodative policy stance,” said Chanda Kochhar, MD and CEO of ICICI Bank.
The measures also indicate a clear shift from rate cuts to liquidity management. After six years, the central bank kept liquidity in the banking system in a deficit mode on an average. “The new proposals were done primarily to aid the transmission of monetary policy,” said Abheek Barua, chief economist, HDFC Bank.
Apart from the policy rate cut, customers will also see a 0.25-0.50 percentage point reduction in interest rates while buying loans due to the new marginal cost-based lending rate (MCLR) calculation, which came into effect from April 1.
“Borrowing rates are coming down significantly in this economy,” Rajan said.