RBI cuts interest rate by 0.5% to boost growth

In a big boost to the economy and borrowers, the Reserve Bank today cut interest rate by 0.50 per cent and relaxed norms for home loan seekers.

In its monetary policy review, RBI reduced the key rate (repo) by 50 basis points from 7.25 per cent to 6.75 per cent with immediate effect.

The central bank cut the GDP forecast to 7.4 per cent for the current fiscal to 7.6 per cent while projecting retail inflation at 5.8 per cent for January.

RBI kept the cash reserve ratio (CRR), portion of deposits mandatorily kept by banks with the central bank, unchanged at 4 per cent.

Consequently, the reverse repo rate adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 7.75 per cent.

RBI Governor Raghuram Rajan said: "Further monetary policy accommodation will be conditioned by the abating of recent inflationary pressures, the full monsoon outturn, possible Federal Reserve actions and greater transmission of its front-loaded past actions."

looking forward, he said inflation is likely to go up from September for a few months as favourable base effects reverse.

"The outlook for food inflation could improve if the increase in sown area translates into higher production. Moderate increases in minimum support prices should keep cereal inflation muted, while subdued international food price inflation should continue to put downward pressure on the prices of sugar and edible oil, and food inflation more generally," he said.

Taking all this into consideration, he said, inflation is expected to reach 5.8 per cent in January 2016, a shade lower than the August projection.

In a bid to give boost to housing sector, the RBI proposed to reduce the risk weights on affordable housing applicable to lower value but well collateralised individual housing loans.

At present, the minimum risk weight applicable on individual housing loans is 50 per cent, it said.