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RBI Cuts Interest Rates to Five-Year Low

The Reserve Bank of India (RBI) slashed its benchmark interest rates by 25 basis points, to 6.5 percent, in a move that was viewed as accommodative by the market. It was the central bank’s first rate cut in six months and in a released statement, RBI Governor, Raghuram Rajan, outlined that there would be more cuts in the near future as he keeps a watchful eye on how the upcoming monsoon season affects the economy.

Lower interest rates are expected to help spur the Indian economy even further, and Governor Rajan was quick to hone in on this fact noting, "…a reduction in policy rate by 25 basis points will help strengthen activity and aid the government’s initiatives [in infrastructure development and spending]." He also highlighted that, "The Reserve Bank will continue to watch macroeconomic and financial developments in the months ahead with a view to responding to further policy action as space opens up."

Commenting on the rate cut, Bhim D. Asdhir, President and Chief Executive Officer at Excel Funds Management Inc. said, "Raghuram Rajan continues to demonstrate his excellence as a central banker in his stewardship of economic and monetary policies in India. This is the fifth time he has cut rates in past year; and during that time India has expanded at a pace far greater than any other major economy in the world."

Further details from Governor Rajan’s statement revealed that the central bank expects inflation to continue to ease and remain around the 5 percent mark until 2017.

The RBI also announced several measures to improve liquidity in the banking system:

  • The central bank stated that it will ensure that durable liquidity in the system is closer to neutral versus a previous deficit of 1 percent of net demand and time liabilities (NDTL)
  • The minimum daily cash balance to be maintained by banks was lowered from 95 percent to 90 percent (with effect from April 16, 2016)
  • The liquidity adjustment facility (LAF) interest rate corridor was reduced to +/-50 basis points versus +/-100 basis points previously

All these measures, along with a market alignment of small-savings rates are projected to aid better monetary policy transmission.

Source: Bloomberg Business, Rajan Cuts India Rates to Five-Year Low, Stays Accommodative, April 5, 2016.

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