Repo Rate Cut By 25 Bps To 6.5%

The Reserve Bank of India (RBI) cut the repo rate by another 25 basis points today to 6.50 per cent, indicating its comfort with the liquidity situation.

The central bank had reduced the repo rate by 25 basis points on April 27 to 6.75 per cent, bringing it below the bank rate for the first time since the introduction of the liquidity adjustment facility on June 5, 2000.

A primary dealer said, "The move has two implications. First, as the RBI reduced the repo rate when the call rates are ruling easy implies that it is happy with the liquidity situation and is not afraid that banks can use the funds for speculative purpose in the forex market. Secondly, the announcement just on the eve of the Rs 5,000 crore auction tomorrow will facilitate the papers to pass through comfortably."

 

Analysts, however, feel that the repo cut may not be followed by an immediate slash in bank rate. "It seems that the apex bank wants to use the bank rate as a long-term instrument, while the repo and the reverse repo rates as the short-term tools," said an analyst with an investment bank.

"However, one can expect the reverse repo rate to come down by 25 basis points as the central bank generally maintains a two percentage point gap between the two rates."

The call market responded positively to the RBI decision as overnight rates came down to close at 6.75 per cent compared with Saturday's closing level of seven per cent. Government security prices jumped by 40-45 paise at the medium to long end, while short-term papers, in tune with the lower call rates, increased by 10-15 paise.