RBI cuts key policy rate by 0.25% to 6.5%, EMIs likely to fall

Mumbai: The Reserve Bank of India has reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 6.75%to 6.5% keeping in mind the assessment of the current and evolving macroeconomic situation.

The RBI also introduced a host of measures to smoothen liquidity supply so that banks can lend to the productive sectors and indicated accommodative stance going ahead.

In the first bi-monthly monetary policy review for the 2016-17 fiscal, RBI Governor Raghuram Rajan said a reduction in the policy rate by 0.25 per cent will help strengthen growth. Accordingly, the repo rate, at which RBI lends to the financial system, has come down to 6.5%. The cut was broadly in line with expectations. However, the stock market reacted negatively and the BSE index, Sensex, was down nearly 300 points.

Rajan also took a host of measures on the liquidity front, starting with the narrowing of the policy rate corridor to 0.50% from the earlier 1 percentage point, which resulted in the reverse repo rate - at which banks can park excess funds with the RBI - being reset at 6%.

The policy said the average overnight borrowings by banks have increased to Rs 1,935 billion in march from Rs 1,345 billion in January.

Stating that the inflation objectives are closer to being realised and price-rise will hover around the 5% mark for the remainder of the fiscal, Rajan reaffirmed that the monetary policy will continue to remain accommodative to address the growth concerns.

RBI also retained its GDP growth forecast at 7.6%, on the assumption of a normal monsoon and a boost to consumption through the implementation of the Seventh Pay panel recommendations.

The central bank said it expects the implementation to hurt inflation by 1-1.5% over a two year period, but added that the shock will not be as strong as that felt during the implementation of the sixth pay panel suggestions.

Rajan welcomed the government move to amend the RBI Act to create a monetary policy committee, saying it will further strengthen the policy's credibility.