The Reserve Bank of India on Tuesday cut the repo rate, the rate at which the central bank lends to banks, by 25 bps to 6.50 percent and also reduced the the minimum daily maintenance of the banks' cash reserve ratio (CRR), in an apparent bid to help banks cut the loan rates further.
It has kept the CRR unchanged at 4.0 percent of net demand and time liabilities (NDTL) but narrowed the policy rate corridor from +/-100 basis points (bps) to +/- 50 bps. For this, it cut the MSF rate by 75 basis points and increased the reverse repo rate by 25 basis points.
It also said the liquidity constraints in the banking system has been because of "the larger-than-usual accumulation of cash balances by the Government", it said. Other factors included unusually heightened and persistent demand for currency, a pick-up in bank credit and flatter deposit mobilisation at this time relative to past years.
However, it commended the government's effort to stick to the fiscal consolidation roadmap.
On growth, the RBI said, it expects the uneven recovery in 2015-16 to strengthen gradually into 2016-17, assuming a normal monsoon, the likely boost to consumption demand from the implementation of the 7th Pay Commission recommendations and OROP, and continuing monetary policy accommodation.
Experts speaking to the CNBC-TV18 said the biggest plus from the fiscal year's policy is the liquidity boost provided by the central bank. They expect the banks to transmit the rate cut more effectively, given the cut in the small savings rate too.