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Saturday, December 6, 2008

RBI reduces repo, reverse repo rates by 100 bps

Buoyed by easing inflation, the RBI on Saturday announced further measures, including a one percentage point cut in the short term rates at which it lends and borrows from banks, in a clear signal to ease interest rates.

Besides, the apex bank also pumped in Rs 11,000 crore in Small Industries Development Bank of India and National Housing Bank to give a fillip to realty and small and medium sectors.

The short-term lending rate (repo) will fall to 6.5 per cent and borrowing (reverse repo) rate to 5 per cent with effect from December 8.

The primary liquidity made available to the system through these measures is worth over Rs 3,00,000 crore, RBI Governor D Subbarao said in New Delhi.

RBI also allowed select banks to buyback foreign currency convertible bonds from customers to "take advantage of current discounted rate at which these bonds are trading."

Announcing the fresh measures, Subbarao said that "taken together with earlier measures, these would step up demand and arrest the growth moderation."

He was also confident that the government's decision to lower petrol and diesel prices would further ease inflation.

The cut in the repo/reverse repo rates, he said, "should result in a reduction in the marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms."

The government has deferred by a day the announcement of the Rs 17,000-crore stimulus package to buoy the realty, exports, infrastructure and auto sectors, which it was expected to make public today immediately after the RBI measures.

The liquidity support given to SIDBI, RBI said, would alleviate the credit stress being faced by the micro and small enterprises and "should revive activity in these employment-intensive drivers of growth".

The facility of premature buyback of FCCBs, he added, will help Indian companies to take advantage of the discounted rates at which these instruments are trading.

Similarly, the RBI governor said the special dispensation for treating loans to Housing Finance Companies as priority sector lending will increase the flow of funds to the housing sectors.

Referring to the RBI's decision to permit banks to restructure loans given to the real estate sector, Subbarao said, "It will help soften pressures being faced by the commercial real estate sector and other sectors in the current environment."

As per the proposal, the concessional treatment facility with regard to the classification of assets by the banks will be extended to the real estate sector for loans that are restructured till June 2009.

The RBI chief further said that the benefit of the concessional rate of interest for exporters up to 180 days "is intended to benefit exporters who have drawn bills for shorter maturities and are facing difficulties in realising the bills on due dates on account of external problems".

Given the uncertain outlook on the global crisis, Subbarao said, "Reserve Bank will continue to closely monitor the developments in the global and domestic financial markets and will take swift and effective action as appropriate."

Noting that period of painful adjustment is inevitable, he said, "RBI's policy endeavour will be to minimise the negative impact of the crisis and to ensure an orderly adjustment."

The central bank, Subbarao said, will try to maintain "a comfortable liquidity position, see that the weighted average overnight money market is maintained with the repo-reverse repo corridor and ensure conditions conducive for flow of credit to productive sectors, particularly the stressed export and small and medium industry sectors."


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