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Last updated: April 26, 2016 at 16:53 pm

RBI cuts interest rates by 50 basis points, surprises markets!

Finally after 2 years of continuous upward revisions RBI, in its annual monetary policy for 2012-13, slashed the policy interest rates by 50 basis points surprising analysts and markets. They were expecting a rate cut of 25 bps, but RBI surprised them all by being aggressive.

RBI

The repo rates at which Indian banks borrow money from Reserve Bank of India now stands at 8% as compared to 8.5% earlier. Similarly, the reverse repo rate at which RBI borrows money from Indian banks has come down from 7.5% to 7%. The CRR (Cash Reserve Ratio) has been left untouched.

Interest Rate Change over past 3 years

Date Reverse Repo Repo
17-Apr-12 7.00 8
25-Jan-11 7.50 8.50
16-Sep-11 7.25 8.25
26-Jul-11 7.00 8.00
16-Jun-11 6.50 7.50
3-May-11 6.25 7.25
17-Mar-11 5.75 6.75
25-Jan-11 5.5 6.5
2-Nov-10 5.25 6.25
2-Sep-10   4.75 6.00
27-Aug-10 4.25 5.75
2-Aug-10   4. 5.5
20-Apr-10 3.75 5.25
19-Mar-10 3.5 5.00
21-Apr-09 3.25 4.75

One of the main reasons that RBI decided to cut the interest rate is because the inflation has more or less come under check. Double digit Inflation was prevalent for about 2 years and RBI did not have an option but to keep the interest rates higher. The rate of inflation has eased to 6.9% in March of this year, which has been over 10% for most part of last year. The average Indian Inflation rate has been 7.99% in last 40 years.

Higher interest rate have slowed down economic as well as corporate growth in India. Couple of months back India’s GDP growth projection was revised downward from 7.60% to 7% for Financial year 2012-13. However, with RBI has cutting the policy rates, it is expected that India’s GDP will register higher than projected 7% growth. 

It’s time to rejoice, as Banks may soon announce slashing of interest rates on home & car loans!

Do you think we will see more rate cuts in coming months?

5 Comments

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  • Rate cuts are surely needed in current scenerio and people who needs really of home loans will be enjoyed due this and next rate cut may be within next two months. FM has been changed and he may bring new taxation rules and his move towards RBI will be keen to control the value of rupee against dollar which has already touched a new high this year.. http://intradayprofittips.com

  • Nice compilation of movement in interest rates in India. I think the biggest challenge before RBI is to tackle inflation and growth at the same time. One of the biggest dilemmas. If they reduce interest rates, growth increases, but inflation goes up and vice-versa. I think they may have to wait for a couple of months before they can decide upon the next reduction. Another interesting point which goes very nicely with this article is Bond Prices & their relationship with Interest Rates. It would be great to have your views on http://insight.banyanfa.com/?p=740. Regards BanyanFA

  • RBI succumbs to government pressure, It is high time the government shrugged off its inertia and dusted off a few policy initiatives — FDI in retail, aviation and pension funds among those keenly watched by offshore investors. With skewed fiscal deficits and slumping industrial production,the government is fast running out of options.

  • I have always believed in the policies of our RBI head Duruvi Subbarao and they have never proven me wrong in the long term plans. This was a wonderful way of cutting down the the inflation without effecting the growth in GDP of the country and in the long term effect of these policy changes the businesses for sale are also becoming easy to buy, so it really is the time rejoice for businessmen

  • As I am writing again and again, our ministers and RBI governer are tooooo single dimensional. It took RBI and mindless ministers 2 years to realize the damage they have done to economy. Every one was shouting that if they are obsessed with only inflation and give a heck to growth, the nation goes down the drain. But they never relented. They kept on squeezing at the throat of economy by further and further increasing rates until the growth became unconcious. Now they are pumping oxygen. Now they dont care for inflation. Simply they hope that inflation will take care of itself. Some wisecrack even suggested that with rate cuts, manufacturing increases and the more production takes care of inflation. Dont they knwo of it for the last 2 years? Here also what action they have taken is not a whole hearted action. Its only half hearted. I completely agree with Chanda Kochar when she said if RBI is going to cut Repo rate, they also have to cut CRR ratio. What industry will do with only Repo rate cut? Unless there is liquidity, Repo rate cut will have minimal impact. Again our mindless ministers and RBI governer will keep cutting repo rates with the hope of repo alone will revive economy. From Industry point of view, there is certain quantity of money available with banks. It is small and expensive. If you only make it cheap, will it achieve goals? You have to make it cheap and more. More can be achieved by cutting CRR rate. It goes on to prove for the infinityeth time the govt’s mindlessness. Just my two paisa :)

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