RBI cuts repo rate by 25 bps in first bi-monthly policy of FY17

The Reserve Bank of India has cut key policy rates by 25bps on Tuesday to 6.50%, in its first bi-monthly monetary policy of the new fiscal.
The RBI has reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 95% of the requirement to 90% with effect from the fortnight beginning April 16, 2016, while keeping the CRR unchanged at 4.0% of net demand and time liabilities (NDTL).
The RBI will continue to provide liquidity as required but progressively lower the average ex-ante liquidity deficit in the system from 1% of NDTL to a position closer to neutrality, it said in a release.
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RBI governor Raghuram Rajan, while speaking to the media after the policy was announced, said, that the RBI has cut 150bps since the beginning of the accommodative cycle.
He said that the apex bank’s focus will remain on the transmission of the rate cuts. “The introduction of the Marginal Cost of Funds based Lending Rate (MCLR) since April 1 will help,” Rajan said. “This is important because it means that a further rate cut even before today’s rate cut, the borrowing cost is significantly cheaper and will continue to do so.”
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The apex bank said it will remain accommodative in the fiscal.
All the key stakeholders were gunning for a rate cut in Tuesday’s policy, keeping in mind that the government stuck to its fiscal consolidation path in its Budget announcement, paving the way for lower interest rates.
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Banks await outcome of RBI policy before cutting rates
Most experts expected the RBI to cut rates by 0.25% to 0.50%. They expect the RBI to remain accommodative going ahead, in the fiscal.
The RBI had left its key policy rates unchanged — with the repo rate at 6.75% and the reverse repo rate at 5.75%; CRR was left unchanged at 4% and SLR at 21.25% — in the last two bi-monthly monetary policy review.
However, this time, the case for a rate cut has also been made stronger by projections of lower inflationary rates in March. The Bank of America Merill Lynch expects that inflation will ease to 5% in the month. Retail inflation eased to 5.18% in February while wholesale inflation continued in the negative zone for the 16th straight month.
Banks have also been keenly eyeing the outcome of the monetary policy before going ahead and cutting deposit and loan rates. This is despite a 1.3% cut in the small savings’ scheme interest rates announced recently.