The Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points, from 7.75 percent to 7.5 percent. The reverse repo rate moved down to 6.5 percent consequently. The cash-reserve ratio is kept unchanged at 4 percent. It is the II change in repo rate since January 2015.
The reasons behind this cut, according to RBI governor Raghuram Rajan include better Fiscal Consolidation and less combined fiscal deficit due to transfer of more funds to states from the center.
Bank shares are in a high demand after the announcement of new repo rate.
Current Reserve Rates
|Reverse repo rate||6.5%|
|Marginal Standing facility rate||8.5%|
What is Repo Rate?
The rate of interest the RBI charges from its clients on their short-term borrowing is the repo rate. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive.
What is basis Point?
A basis point is a unit of measure to describe the percentage change in the value or rate of a financial instrument. One basis point is equivalent to 0.01% (1/100th of a percent). In most cases, it refers to changes in interest rates and bond yields.
For example, if the RBI has announced that it reduced current SLR 22 by 25 basis points, it means the new SLR will be 21.75.