The Reserve Bank of India (RBI) in its FY2010 Annual Policy announced yesterday, cut the Repo and Reverse Repo rate by 25bp each, keeping the CRR and SLR unchanged.
These measures are a continuation in the concerted efforts by the apex Bank to maintain a downward trend in interest rates to revive domestic demand.
“RBI is likely to go slow in reducing interest rates further before banks would pass on the benefits to borrowers. The government and central bank are more likely to use moral suasion to induce banks to slash their deposit as well lending rates,” states a report from Kotak Securities.
“The significant moderation in growth estimates places an urgent need to boost the flow of credit to all productive sectors of the economy, particularly to MSMEs, to aid the process of economic recovery,” said Yashika Singh, Head Economic Analysis, Dun & Bradstreet India.
“The 25 bps cut in repo is therefore yet another move by the RBI to encourage lending. The 25 bps cut in reverse repo rate is aimed at discouraging banks from parking an increasing amount of funds in the reverse repo window and thus increasing the availability of funds for commercial lending,” she adds.
“However, while these rate cuts could result in lowering of short- term rates, the long end of the yield curve continues to remain at elevated levels owing to the Government’s huge borrowing programme,” Singh states.
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