Reserve Bank of India cuts interest rate by 25 bps

The Reserve Bank of India (RBI) Tuesday cut the headline lending rate by 25 basis points but consumers were not expected to see interest rates coming down in a hurry.

RBI Governor D Subbarao struck a cautious note saying the headroom for further cuts was limited since food inflation was high and still rising. The other worry is the current account deficit, the gap between what India earns from exports and what it spends on imports.

For the third quarter of 2012-13, this came in at a record high of 5.4 per cent of GDP.

Reacting to the cut in repo rate — the interest rate at which banks borrow cash from the RBI — bankers ruled out any follow through reduction in rates at which their clients borrow from them.

Cash available in the market is tight as the government has cut back expenditure and companies too are investing less while households have little savings to offer banks as deposits.

HSBC India country head Naina Lal Kidwai said banks won't be in a hurry to cut interest rates. Banks would have to make an assessment of their year-end liquidity conditions and await further signals from the RBI in April for the next financial year.

On Tuesday, Subbarao expectedly slashed the key repo rate by 25 basis points to 7.50 per cent to raise the sagging growth rate. The cash reserve ratio, which is the portion of deposits banks keep with the RBI, was kept unchanged at 4 per cent, but the central bank gave a guidance that it will continue to inject liquidity as necessary through various instruments, including open market operations, to ensure adequate flow of credit to productive sectors of the economy.

The reverse repo rate - the rate at which the RBI borrows funds - will come down by 25 bps to 6.50 per cent. In its third quarter policy review on January 29, the RBI had lowered the repo rate by 25 bps and also injected liquidity through a similar reduction in CRR.

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