RBI monetary policy: Raghuram Rajan cuts interest rate by 0.25%; auto, home loans to be cheaper

Zee Media Bureau

New Delhi: The Reserve Bank of India on Tuesday cut its policy rate by 0.25 percent while unveiling its first bi-monthly policy review for this fiscal, paving way for cheaper home and auto loans.

Rajan, who had focused on quelling inflation since taking office in September 2013, lowered the benchmark repo rate to 6.50 percent, the lowest since January 2011.

The RBI also announced to narrow the policy rate corridor from +/-100 basis points  to +/- 50 basis points by  reducing the MSF rate by 75 basis points and increasing the reverse repo rate  by  25  basis  points, with a view to ensuring finer alignment of the weighted  average call rate (WACR) with the repo rate.

Consequently, the reverse repo rate under the LAF stands adjusted to 6 percent, and the marginal standing facility (MSF) rate to 7  per cent.  The Bank Rate which is aligned to the MSF rate also stands adjusted to 7 percent.  

The RBI, however, has decided to keep the cash reserve ratio (CRR), the portion of deposits which the banks are required to have in cash with the central bank, unchanged at 4.0 percent.

RBI Governor Raghuram Rajan, on February 2, had left the key interest rate unchanged citing inflation risks and growth concerns.

In all, the RBI reduced by repo rate by 1.25 percent in 2015, but it has been frustrated by commercial banks failure to pass on the full benefits to the wider economy.

Complaining of tight liquidity in the financial system, banks only passed on about half of the RBI`s rate reductions to borrowers so far.

And, despite the RBI easing last year more aggressively than at any time since the 2008-2009 global financial crisis, annual economic growth slowed to 7.3 percent in the October-December quarter from 7.7 in the previous quarter.

The slowdown left the economy further adrift of the government`s 8 percent growth target, a rate needed to generate jobs for the millions of Indians joining the workforce each year.

Retail inflation as measured by the Consumer Price Index (CPI) eased to 5.18 percent in February as food prices rose at a slower pace, while Wholesale Price Index stayed in the negative territory for the 16th month in a row.

Industrial output for the third month in a row remained in the negative territory contracting 1.5 percent in January due to poor showing of manufacturing sector raising industry clamour for rate cut by the RBI.