Rate cuts on course, but banks still need the Rajan push
A policy rate cut is effective if banks lower or raise rates in tandem with the central bank actions. Lower policy rates should translate into lower bank rates for borrowersretail and corporate.
An informal poll in the Mint newsroom in Delhi, moments before the credit policy announcement on 29 September, had a rare consensus—he’ll go for 50! We were predicting the quantum of the cut on the three rates announced by the central bank that are linked to each other. With the market expecting a 25-basis point cut, to have done a 25 would not have caused a ripple. So, gut feel said that to make an impact, Reserve Bank of India (RBI) governor Raghuram Rajan will go for 50. The RBI did cut the repo rate by 50 basis points to 6.75%, and this drags down the reverse repo (the rate at which banks lend to the RBI) down to 5.75% and the bank rate to 7.75%. One basis point is one-hundredth of a percentage point. For those not watching the tickers and wondering why the rate cut was national breaking news, here’s a quick snapshot of why the RBI rate announcement is important.
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