RBI cuts interest rate by 0.5% to boost growth

This is third rate cut by the Shikha Sharma-led bank this fiscal, following a 0.20 per cent cut in April and a 0.10 per cent cut in June.


After lowering the interest rate by 50 basis points to boost economy, Reserve Bank Governor Raghuram Rajan today said the RBI will work with the government to ensure a faster transmission and also hoped that banks will pass on the benefits to customers.

SBI associate State Bank of Bikaner & Jaipur (SBBJ) also reduced its base rate to 9.7 per cent from the existing rate of 9.95 per cent while Allahabad Bank slashed its base rate by 25 bps to 9.7 per cent.

In early September, HDFC Bank, India’s second-largest private lender, had cut its base rate by 35 bps to 9.35 per cent. Currently, SBI, India’s largest bank, has the lowest base rate.

Markets are factoring in a rate cut from the Reserve Bank of India, the fourth time this year, as it meets on Tuesday. The central bank’s January 2016 target of 6% inflation or below will likely be achieved, Rajan said, conveying confidence in the bank’s ability to restrain rampant price growth going forward.

The Reserve Bank of India, governed by Raghuram Rajan, cut its repo rate to 6.75 percent from 7.25 percent and the reverse repo rate to 5.75 percent from 6.25 percent with immediate effect.

“Since pressures on inflation and growth exist on both sides, and the RBI has lent a helping hand to growth through 2015, the central bank may be well placed to shift to a balanced stance at this juncture”, she wrote. Notwithstanding the more than expected easing, the markets fell on the concerns over the diminished prospects of future rate cuts and disappointing outlook on domestic and global economic scenario.

Since January this year, the banking regulator has lowered its repo rate by 125 basis points.

The move comes amid widespread call for reducing rates by other banks and analysts and at a time when inflation is running at a record low and the economy in danger of slowing down.


“Under these circumstances, monetary policy has to be accommodative to the extent possible, given its inflation goals, while recognising that continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth”. Banks price loans based on the cost of funds, with deposit rates playing the most crucial part.

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