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Economy

RBI Cuts Rates by 0.25% to 7.25%

In the 2013-14 Macroeconomic Policy the RBI has decided to cut rates by 25 basis points (0.25%), bring the repo rate down to 7.25% and reverse repo to 6.25%. The Cash Reserve Ratio (CRR) remains unchanged.

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While we remain in the “cutting” part of the rate cycle, the RBI has cautioned that because of benign inflation in the system, there is little scope for cutting rates further. Monetary policy can only do this much. We are now at rates last seen in September 2011.

Repo is the “Repurchase rate” or what the banks pay to borrow overnight from the RBI. The idea of tweaking this rate is that if you lower it, banks will lower their interest rates to consumers, who will then borrow and invest and grow the economy, thus rekindling GDP growth.

Sadly, India’s Interest rate transmission is broken. At least on the downside. In that post I’ve argued for five things India must do – and RBI has done two of them, at least partially. It has penalized loan restructuring, and it has tried to expand bond markets. While this is good, there is significantly more still to be done; and I don’t expect the lower rates to suddenly make banks want to give you a loan any more than yesterday.