With this, the repo rate—the interest charged by the RBI on borrowings by commercial banks—will be down to 6.5 per cent and reserve repo—the rate at which the central bank borrows money from commercial banks—will be down to 5 per cent.

The RBI has, however, kept the cash reserve ratio (the portion of deposits banks have to keep with the RBI) unchanged at 5.5 per cent, stating there was enough liquidity in the system. The statutory liquidity ratio (the portion of deposits banks have to invest in government securities) has also been left untouched.

In another measure that will result in lower home loans, the RBI has decided that loans granted by banks to housing finance companies (HFCs) for on-lending to individuals may be classified under the priority sector, provided the loans granted by HFCs do not exceed Rs 20 lakh per dwelling unit per family. The priority sector status will enable banks to reduce interest rates on such loans significantly.

The RBI had cut the repo rate from 9 per cent to 7.5 per cent in October-November as a signal to commercial banks to bring down rates, but not many private banks did that. This time, RBI Governor D. Subbarao, while announcing the cut in rates in Mumbai on Saturday, said in no uncertain terms that commercial banks “need to get the signal”.

“We hope that commercial banks (will) act accordingly. It is a matter of time before banks take a decision on interest rates on home loans. Monetary transmission takes time. However, as there is adequate liquidity in the system now and the demand for money is also falling, interest rates will also move down,” Subbarao said.

On Friday, ICICI Bank reduced its interest rate for home loans of Rs 20 lakh and below by 1.50 per cent to 11.50 per cent. Bankers said that with a comfortable liquidity position and fall in inflation, interest rates would now fall across the board.

A reduction in the repo rate will make borrowing cheaper for commercial banks. The cut in reverse repo rate—the first this year—to 5 per cent will make it less lucrative for banks to park funds with the central bank.

The apex bank did not make any changes in the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). To provide easier credit to micro and small enterprises, the RBI enhanced the refinance facility for the Small Industries Development Bank of India (SIDBI) by Rs 7,000 crore. The RBI is also working on a Rs 4,000 crore refinance facility for the National Housing Bank (NHB).

Commenting on the health of the economy, the RBI governor said, “The outlook for the Indian economy is mixed. Confidence in global credit markets continues to be low, and credit lines remain clogged. There is evidence of economic activity slowing down.”

Among various measures, the RBI also allowed buyback of foreign currency convertible bonds (FCCBs) of companies out of rupee resources. With export growth turning negative, it also said overdue export bills up to 180 days will get credit not exceeding BPLR minus 2.5 percentage points.

—With Swarup Chakraborty