The Reserve Bank of India (RBI) sent a strong signal to banks to lower interest rates on all types of borrowings by cutting the repo and reserve repo rates by 100 basis points. The cuts are part of a mega economic stimulus package to make borrowing more affordable.

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”.

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