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Repo Rate : the percentage on which commercial banks used to take loan from R.B.I for a short time (few hours 15 days). C.A.D ( Current Account Deficit ) : it is the difference between countries exports and imports.
Introduction
These are measures adopted by the central bank of the country to control the inflation. Measures include : 1. higher reserve requirement, 2.consumer credit control, 3.sale of government securities in the open market, 4.increase rates..
RBI India review the monetary policy timely and make changes according to the need of hour.
RBI on 29 jan 2012-2013 review its monetary policy and draw changes in repo rates and reverse rates
RBI has cuts CRR (cash reserve ratio) by 0.25% (4.00%) and repo rate also by 0.25%(7.75%).
Due to the reduction in CRR BY 0.25% liquidity of Rs. 18000 crore being created in the market.
Now banks would circulate more credit or would create more credit control to common man ,business houses.
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Loan would easily available to the common man ,business houses due the cuts in banks by the additional liquidity generated for credit creation. Banks would lower the interest rates respectively like PNB ,IDBI did as soon as the RBI cuts bank rates. This will proved beneficial to the stock market and would improved its position and initiate investment . Personal loan would available and borrowing schemes (interest rates) would gets cheaper.
Impact on government
Prove to a boost for economic growth (GDP) especially in the current scenario as GDP growth is shrunken due economic slowdown in USA and also due to European debt crisis. It would certainly improved the economic environment of the country and would initiate FDI and FII. The government would fetch more credit from the market.
On the lending side,there is going to be transmission .there will be a positive impact on EMI.On the deposit side,we are going to watch the situation.In the long term,bank cant take a hit on NIMs.Chandra kochhar,CEO&MD,ICICI Bank.
Lower lending rates without cutting deposits will impact their margins. Banks will not indefinitely be able to do itThey will have to definitely look at opportunities for passing it on.K.R Kamath,CMD PNB
Summary
From the last one and half year RBI is compensating GDP growth with the inflation then too the it is not tapped under 7% ,currently it is 7.45%. Now focus of RBI is at least to maintain the GDP growth which is in the current accounting year will fall somewhere around 55.6%. The liquidity will surely add on to the inflation but RBI look on the point that if that additional liquidity will generated more employment and growth then this would be a positive sign for the economy
One reason behind the rates cut by RBI can be IIP(index for industrail production) is on the down side due to the high interest rates which haulted many industrial projects.
Fiscal deficit is soaring and exceedes it alarming standard this proved threat to the GDP ,this due economic slowdown in USA and europe due to which imports are rising and exports plungged.
Solution rather than rate cuts Government with RBI should try to frame strategy to use 20 tons of the unused gold in Indian homes . If 10% of it can be used it would create the liquidity of 1 trillion in the economy.
RBIS STATEMENT
This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks.
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