The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Mohit Jalan, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
The Reserve Bank of India on 4th April cut the Repo rate by 25 bps to 6.5% to improve the transmission of interest rate cuts through the system by promising easier liquidity condition. RBI has now cut rates by 150 bps since last January but only about half of has been passed on by banks through lending rate cuts.
The cash reserve ratio (CRR) which the banks maintain remains unchanged at 4%, although banks have been given some leeway to maintain the daily balance of CRR at 90% compared to 95% earlier. This gives lenders some flexibility in managing liquidity.
RBI also reduced the band between the repo rate and the reverse repo rate to 50 bps from the current 100bps.While most market participants had expected some liquidity measures, a complete shift in the liquidity stance comes as a positive surprise and will help bring down rates in the system over time.
The shift in liquidity stance will help banks lower their lending rates and thus transmit the policy rate cuts to industry which can a boost the economy which is already doing well as compared to other economy.