The Reserve Bank of India (RBI) on Tuesday cut some key rates by 50 basis points in a bid to push industrial growth and stimulate economy - a move that may also see interest rates falling on housing, automobile and commercial loans.
Announcing the monetary policy for the current fiscal, RBI Governor D. Subbarao said the repurchase rate was being cut by 50 basis points to 8 per cent, which will automatically see the reverse repurchase rate also drop to 7 per cent from 7.5 per cent.
The repurchase rate is the interest the central bank levies on short-term borrowings by commercial banks. The reverse repurchase rate is the interest on short-term lending. A cut in these rates rate reduces the cost of accessing funds for lending institutions.
A cut in these rates also eases money supply in the system by making it more attractive for commercial banks not to park their funds with the Reserve Bank of India in the form of government securities, and instead lend it for commercial purposes.