REPO REDUCTION-The Painful Adjustment in Indian Economy

The temporary downturn of Indian Economy:

With blasts and terror around the Indian waters which lowered the Indian society's morale,the graph of the Indian economy is undergoing a steady recession.India will experience economic slump for a short period of time.This period is regarded as the Global economic decline period.Before going into the news let me just define some terms which might be useful in understanding the content of this post.

Repo Rate:Repo rate is the rate at which the commercial banks borrow money from RBI(Reverse Bank of India).The reduction in repo rate will help the banks to get money with a lesser rate.

Reverse Repo Rate:Reverse Repo Rate is the converse of Repo rate.Reduction in this,will facilitate the RBI to borrow money from the other commercial banks.

The reserve requirement (or required reserve ratio) is a bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes. These reserves are designed to satisfy withdrawal demands, and would normally be in the form of fiat currency stored in a bank vault (vault cash), or with a central bank

SLR(Statuatory Liquid Ratio):It is the amount which a bank has to maintain in the form of cash, gold or approved securities.  

  

The RBI announced the "cut in the repo and reverse repo rate" earlier today:

Mumbai (IANS): In a bid to lower the cost of borrowings for commercial banks and help them reduce interest rates for the corporate sector, the Reserve bank of Indiaon Saturday cut two key interest rates but said a period of “painful adjustment” was inevitable for the country's economy.

Reserve Bank of India (RBI) Governor D. Subbarao told a press conference in Mumbai that the repurchase rate, or the repo rate, was being cut by 100 basis points, while the reverse repo rate will be reduced by a similar amount.

The new rates take effect on Monday.

The repo rate, currently at 7.5 per cent, is the interest charged by the RBI on borrowings by commercial banks. A reduction in the same makes the cost of borrowings cheaper for commercial banks.

The reverse repo rate, on the other hand, is the rate at which the central bank borrows money from commercial banks. A lowering of this rate, presently at 6 per cent, makes it less lucrative for banks to park funds with the central bank.

There were no changes in cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

Similarly, the CRR, the minimum liquid funds banks have to keep against deposits,is presently at 5.5 per cent. The statutory liquidity ratio (SLR), the amount these institutions have to hold in government bonds, is currently pegged at 24 per cent.

The rate cuts apart, the refinance facility for the Small Industries Development Bank of India (Sidbi) was being enhanced by Rs 7,000 crore and to the National Housing Bank (NHB) by Rs 4,000 crore

"Going forward, the outlook for the Indian economy is mixed," Subbarao told the press conference, expressing worries over the slowing down of industrial growth and the decline in merchandise exports in October.

“Confidence in global credit markets continues to be low, and credit lines remain clogged,” he said, adding: “The outlook for India going forward is mixed. There is evidence of economic activity slowing down.”

The central bank governor said there was also difficulty to precisely assess the impact of every development in the global financial system on the Indian economy but said measures will be announced from time to time to ease the pressures.

“The fundamentals of our economy continue to be strong. Once the crisis is behind us and calm and confidence are restored in the global markets, economic activity in India will recover sharply,” he said.

“But a period of painful adjustment is inevitable.”