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'Repo cut to have good impact on interest rates'

business Updated: Jun 04, 2012 18:05 IST

Prime Minister Manmohan Singh today said Reserve Bank's decision to reduce short-term lending (repo) rate by 100 basis points will have beneficial impact on the interest rates.

"It will have beneficial effect on the interest rate structure, and in combination with the other steps to increase liquidity, will help to support economic activity and investment," he said while making a statement on the impact of ongoing global financial crisis on India.

Reserve Bank has lowered the repo rate by 1 per cent in the morning allowing banks to borrow funds from the central bank at 8 per cent as against 9 per cent earlier. The decision was aimed at improving the liquidity position in the country.

"Government welcomes this decision," Singh said while pointing out that it was broadly consistent with "our objective to control inflation which has already begun to moderate."

Recalling the steps taken by the RBI to infuse liquidity into the system, Singh said the central bank has cut the Cash Reserve Ratio (CRR) by a total of 250 basis points and relaxed the Statutory Liquidity Ratio (SLR) requirements by one percentage point.

Subsequently, he added, the RBI opened an additional window of half a percentage point specifically to enable banks to draw funds to provide liquidity to the mutual funds.

"As a result of these steps, the liquidity position in the financial system has improved considerably. The call money rate today is around 6.8 per cent," the Prime Minister said.

In addition, he said, the government also arranged to provide, in advance, a sum of Rs 25,000 crore to the banking system under the debt waiver and debt relief scheme.

However, the Prime Minister added, "it is not enough to infuse liquidity. The liquidity must translate into expanded flow of credit to industry, trade and business. Suitable advisories have been issued by RBI and Ministry of Finance to the banks to ensure that borrowers are provided adequate credit, including export credit and working capital".

The banks, he stressed, must also provide adequate funds in the form of investment or credit to mutual funds and NBFCs for on-lending to industry, trade and business. "These institutions are an important part of larger financial system and banks are being encouraged to provide liquidity to ensure that there is no disruption.