To combat liquidity crisis Repo rate cut by RBI

The drastic measure taken by RBI and the finance ministry to implement the unexpected CRR cut and the much expected repo rate 100 basis point(50 was the expected one).RBI has explained in the staetment.It is sure as per experts the cost of money will be cheaper for the banks and the lending rates will reduce with a 6 months time horizon.

"India too is experiencing the indirect impact of the global liquidity constraint as reflected by some signs of strain in our credit markets in recent weeks. In order to alleviate the pressures and, in particular, to maintain financial stability, the Reserve Bank has decided to reduce the repo rate under the Liquidity Adjustment Facility (LAF) by 100 basis  points to 8.0 per cent with immediate effect."

Also the Governor has said."Risk aversion, deleveraging and frozen money markets have not only raised the cost of funds for Indian corporates but also its availability in the international markets. This will mean additional demand for domestic bank credit in the near term. Reduced investor interest in emerging economies could impact capital flows significantly. The impending recession will also impact on Indian exports."

Finance Minister P Chidambaram said that rate cut is in line with maintaining growth and moderating inflation. India's inflation reached its four-month low last week at 11.44% as a result of fall in the prices of various fuel products. Chidambaram also added that the repo rate cut will help enthuse the investors.

The repo rate cut is in addition to the number of monetary expansion measures taken by RBI in the last one month to increase the liquidity in the Indian banking system.

RBI has cut the CRR rate in last 15 days by 2.5%, releasing about Rs 100,000 crore into the system. Last week it also said that it will hold an additional 14-day money auction to help banks meet the cash requirements of mutual funds that are facing high redemption pressure from investors.

Finally what it means for the depositors whether they will enjoy the 10.5% intrest rate for the deposits  and the already overburdened middle class due to interest rate hikes in housing loans.Put a pause and see