RBI cuts repo, reverse repo rates

Buoyed by easing inflation, the RBI on Saturday announced further measures, inlcuding a one percentage point cut in the short term rates at which it lends and borrows from banks, in a clear signal to ease interest rates.

Besides, the apex bank also pumped in Rs 11,000 crore (Rs 110 billion) in Small Industries Development Bank of India and National Housing Bank to give a fillip to realty and small and medium sectors.

The short-term lending rate (repo) will fall to 6.5 per cent and borrowing (reverse repo) rate to 5 per cent with effect from December 8.

• RBI's economic stimulus: Highlights

The primary liquidity made available to the system through these measures is worth over Rs 3,00,000 crore (Rs 3,000 billion), RBI Governor D Subbarao said in Mumbai.

RBI also allowed select banks to buyback foreign currency convertible bonds from customers to 'take advantage of current discounted rate at which these bonds are trading.'

Announcing the fresh measures, Subbarao said that 'taken together with earlier measures, these would step up demand and arrest the growth moderation.'

He was also confident that the government's decision to lower petrol and diesel prices would further ease inflation.

RBI has since October reduced the short-term lending rate by 250 basis points. After several months, the central bank has slashed the reverse repo to 5 per cent.

• RBI's economic stimulus: Highlights

The reduction in short-term interest rates will result in reduction of the cost of funds for the banks and will enable them to improve flow of credit to productive sectors of the economy on viable terms, Subbarao said.

The RBI, however, did not change cash reserve ratio, the amount of deposits which banks are required park with the apex bank.

To encourage the housing finance companies to provide more funds to the real estate sector, the RBI Governor said that housing loans of less then Rs 20 lakh (Rs 2 million) should be treated as priority sector lending.

Exports, which has been reeling under the impact of the global downturn, has been provided some more sops.

Henceforth, the subsidised interest rate applicable to the post-shipment credit will be extended to overdue bills for 180 days.