The reduction in rates will accelerate the downward movement of deposit rates and will also translate into lower rates for borrowers.
The reduction in rates will accelerate the downward movement of deposit rates and will also translate into lower rates for borrowers. Some banks which have not revised their benchmark base rates in the last year are expected to do so now.
Following the rate cut RBI's repo rate - the rate at which it provides overnight funds to banks — stands reduced to 7.75% from 8% earlier. The reverse repo rate (the rate at which it borrows funds from banks) stands adjusted to 6.75%, and the marginal standing facility (MSF) rate (an emergency funding window) and the Bank Rate are revised to 8.75% with immediate effect.
Conveying his greetings for Makar Sankranti, Pongal and Uttarayana, the RBI governor Raghuram Rajan said that fall in overall prices and the ebbing price pressures in respect of cereals and the large drop in international crude and other commodity prices have reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects.READ ALSO: Stocks rally after RBI's surprise rate cut
Finance ministry welcomes RBI rate cut as inflation drops
"Households' inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009. Inflation outcomes have fallen significantly below the 8% targeted by January 2015. On current policy settings, inflation is likely to be below 6 per cent by January 2016," Rajan said in a statement.
Latest inflation data from the government shows that retail prices as measured by the consumer price index was 5.2% December much below RBI's best case scenario as forecast in its monetary policy.
The governor added that these developments have provided headroom for a shift in the monetary policy stance.
In December the governor had stated that "if the current inflation momentum and changes in inflation expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle".
Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure. The latter would be needed to ensure that potential output rises above the projected pick-up in growth in coming quarters so as to contain inflation.
Read this in Hindi: रेट कट से झूमा बाजार, सेंसेक्स 600 पॉइंट उछला
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