The Reserve Bank of India (RBI) slashed two key interest rates which will enable to lower the cost of borrowings for commercial banks and help them reduce interest rates for the corporate sector. According to RBI governor, D. Subbarao, the repurchase rate, or the repo rate has been cut by 100 basis points and the reverse repo rate will also be reduced by another 100 basis points. The new rates will come into effect from Monday (December 8).

 

However, no changes have been made in cash reserve ratio (CRR) and statutory liquidity ratio (SLR). Earlier, RBI had reduced the CRR from 7.5 percent to 5.5 percent. CRR refers to the minimum liquid funds banks have to keep against deposits. Currently SLR, the amount these institutions have to hold in government bonds, is placed at 24 percent. The repo rate is the interest charged by the RBI on borrowings by commercial banks while reverse repo rate is the rate at which the central bank borrows money from commercial banks.

 

The reduction in both the rates will help the commercial banks to function properly in this ongoing period of recession. According to RBI governor, the confidence in global credit markets show declining trend and credit lines remain blocked. All these factors are retarding the economic activities of India. He assured that once the crisis gets over, Indian economy will restore its lost health.