Another Stimulus Package: Rate cuts

Reserve Bank of India cut Repo and Reverse Repo Rate by 50 bps. Repo rate, the rate at which central bank (RBI) lends to banks is now at 5%. Reverse Repo is the rate at which central bank takes money from banks is now at 3.5%. This was very much expected for quite some time with growth as a key issue and inflation quite low (As Rate cuts can take inflation higher, but inflation is already at a low of 3.2% now) RBI cut rates to infuse more credit. Banks are now expected to cut lending rates. Though there is no change to CRR, as RBI believes there is enough liquidity in the system.

This Rate cut is done after worse than expected figures across the globe. The global cues for this were:

1. US real GDP contracted sharply at an annualised rate of 6.2% in the fourth quarter of 2008
2. Unemployment rate in the US has moved up to 7.6%
3. The real GDP in the euro area also declined by 1.5% in the fourth quarter of 2008
4. Japanese exports fell by 45.7% in January 2009
5. Japanese economy also contracted sharply by 3.3% in the fourth quarter of 2008

In short the major effect of these cuts could be:

1. Cheaper loans and lower deposit rates by banks
2. Better GDP figures for the 4th quarter
3. Increase in inflation by small amount
4. Weakening INR against USD

There have been series of rate cuts since Dec '08:

Reverse repo rate (%)
Jun 8 ‘06	5.75
Jul 25 ‘06	6
Dec 8 ‘08	5
Jan 2 ‘09	4
Mar 4 ‘09	3.5

Repo rate (%)
Oct 20 ‘08	8
Nov 3 ‘08	7.5
Dec 8 ’08	6.5
Jan 2 ‘09	5.5
Mar 4 ‘09	5