April 17th, 2012
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RBI cuts interest rate by 50 basis points

RBIMumbai: Reserve Bank of India cut interest rates by 50 basis points for the first time in three years to give a boost to flagging economic growth but warned that there is limited scope for further rate cuts. This move will push industrial growth and stimulate economy.

As a result of these cuts interest rates on housing, automobile and commercial loans will fall. The RBI cut its policy repo rate to 8.00 percent, which will automatically see the reverse repurchase (reverse repo) rate also drop to 7 per cent from 7.5 per cent.

The repo rate is the interest the central bank levies on short-term borrowings by commercial banks. The reverse repo rate is the interest on short-term lending. A cut in these rates rate reduces the cost of accessing funds for lending institutions. The RBI left unchanged the cash reserve ratio (CRR), the share of deposits that banks must hold with the central bank, at 4.75%, in line with expectations, after cutting it by 125 basis points since January to ease tight market liquidity. The commercial banks would now be more interested in lending money for commercial purposes instead of  parking their funds with the Reserve Bank.

The RBI raised rates 13 times between March 2010 and October 2011 as it struggled to contain price pressures. On Monday, the headline wholesale price index eased slightly to 6.89% for March but was still above expectations, as a drop in manufacturing inflation was offset by a surge in food inflation.



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