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Sensex reaches 30,000 after RBI reduced repo rate

March 5, 2015EconomyOmkar Sawant

Soon after the Union Budget, RBI governor Raghuram Rajan reduced the repo rate by 25 basis points to 7.5%, on account of improved government finances. This move caused Sensex to reach all time high – 30,000.

RBI

This is also the second time that the RBI has cut rates outside its scheduled reviews to boost investment and growth.

Indifference of Banks

  • Though this is RBI’s second rate cut, still only three out of 45 banks- Union Bank, United Bank and Karur Vysya- have so far lowered the benchmark rates, while the others chose to pocket the gains at the cost of borrowers.
  • Banks are refusing to lower rates immediately due to earning pressure on account of rising bad loans.

Reasons for the cut

  1. Improvement in the government’s finances
  2. The government is transferring a significantly larger amount to the states without entirely devolving responsibility for funding central programmes
  3. Due to lower international energy prices, there is an intent to shift from spending on subsidies to spending on infrastructure.
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