The monetary and banking regulator, Reserve Bank of India, has reduced key policy rates, the repo rate and cash reserve ratio, by introducing 25 basis point cuts in both of them.
The central bank justified the reduction in policy rates by stating that currently it was important to check the growth in economy without putting external stability at risk.
Repo rate refers to the interest rate at which RBI lends money to other banks to help them overcome short term liquidity deficits. On the other hand, Cash Reserve Ratio is the amount of funds which banks have to park with the central bank.
Reportedly, the 25 bps reduction in repo rate was expected in the industry but, the 25 bps cut in CRR has come as a surprise to bankers.
Following the rate reduction, currently, repo rate stands at 7.75 percent, lower from the earlier rate of 8 percent. Similarly, the CRR stands at 4 percent, decreasing from the earlier 4.25 percent. The new rates have become applicable with immediate effect.
The lowering of key policy rates will reportedly facilitate banks to reduce their minimum lending interest rates in the retail loans segment, MSME segment and corporate loans segment.