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The Reserve Bank of India (RBI) announced a 25 basis cut in its policy interest rate this morning, lowering it to more than five-year low. The prevailing rate now stands at 6.5 per cent. The central bank also announced reduction in minimum daily maintenance of cash reserve ratio from 95 per cent to 90 per cent.
RBI had reduced repo rate by 125 basis points during last year, but complaining of tight liquidity in the financial system, banks have only passed on about half of the rate reductions to borrowers so far. The apex bank is expected to retain its stance, raising the prospect of another 25 bps rate cut later this year.
RBI has, however, retained growth forecast at 7.6 per cent for current fiscal year. On the inflation front, RBI sees 7th pay commission impact at 100 to 150 basis point over the next two years. It expects current year's Consumer Price Index to remain at around 5 per cent.
On banking reforms, the apex bank hinted towards licensing differentiated banks, which concentrate on wholesale and long-term financing.
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