Reserve Bank of India has reduced the repo rate under the Liquidity Adjustment Facility (LAF) by 100 basis points to 8% with immediate effect. This is the first time that repo rate has been cut since 2004 by RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate
The statement issued by RBI said that global financial situation continues to be uncertain and unsettled. The statement added that even as countries directly affected by the turmoil have taken aggressive action to manage the crisis, confidence and calm is yet to be fully restored in the financial markets.
Finance Minister P Chidambaram said that rate cut is in line with maintaining growth and moderating inflation. India's inflation reached its four-month low last week at 11.44% as a result of fall in the prices of various fuel products. Chidambaram also added that the repo rate cut will help enthuse the investors.
The repo rate cut is in addition to the number of monetary expansion measures taken by RBI in the last one month to increase the liquidity in the Indian banking system.
RBI has cut the CRR rate in last 15 days by 2.5%, releasing about Rs 100,000 crore into the system. Last week it also said that it will hold an additional 14-day money auction to help banks meet the cash requirements of mutual funds that are facing high redemption pressure from investors.