RBI - cuts CRR by 50bps; repo & reverse repo by 100bps

The much awaited stimulus package is announced by RBI to augment domestic and forex liquidity and to ensure that credit continues to flow to productive sectors of the economy. Following measures have been taken:

Reduce the repo rate under the liquidity adjustment facility (LAF) by 100 basis points from 6.5 per cent to 5.5 per cent with immediate effect.
Reduce the reverse repo rate under the LAF by 100 basis points from 5.0 per cent to 4.0 per cent with immediate effect.
Reduce the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 5.5 per cent to 5.0 per cent from the fortnight beginning January 17, 2009.

Effects:

Reduction in the CRR will inject additional liquidity of around Rs. 20,000 crore to the financial system. It is expected that the reduction in the policy interest rates and the CRR will further enable banks to provide credit for productive purposes at appropriate interest rates. Cumulative amount of primary liquidity made available to the financial system through various measures initiated by the Reserve Bank is over Rs. 3,00,000 crore.

Taking the signal from the reductions in the repo and reverse repo rates, all public sector banks and several private sector and foreign banks have reduced their benchmark prime lending rates (BPLRs). Notably, the top five public sector banks have reduced their BPLRs from a range of 13.75-14.00 per cent as on October 1, 2008 to a range of 12.00-12.50 per cent presently. These rates are likely to reduce further to bolster demand for home loans, which is a good sign for reality sector.

The monetary stimulus package will be beneficial for corporate bonds. Buoyant liquidity as evident from the LAF windows, with banks parking over Rs. 60000 crores, followed with rate cuts will propel contraction in the shorter end of the rate spectrum, which will provide opportunity for short term funds as well as income funds.