Given weak private investment in the face of low capacity utilisation, a reduction in the policy rate by 0.25 percent will help strengthen growth, RBI Governor Raghuram Rajan said in the first bi-monthly monetary policy review for the 2016-17 fiscal, which began on April 1.

Accordingly, the repo rate, at which RBI lends to the financial system, has come down to 6.5 percent.

The cut was broadly in line with expectations. However, the stock market reacted negatively and the BSE index, Sensex, was down nearly 300 points.

Rajan also took a host of measures on the liquidity front, starting with the narrowing of the policy rate corridor to 0.50 percent from the earlier 1 percentage point, which resulted in the reverse repo rate - at which banks can park excess funds with the RBI - being reset at 6 per cent.
    
The policy said the average overnight borrowings by banks have increased to Rs 1,935 billion in march from Rs 1,345 billion in January.

Stating that the inflation objectives are closer to being realised and price-rise will hover around the 5 percent mark for the remainder of the fiscal, Rajan reaffirmed that the monetary policy will continue to remain  accommodative  to address the growth concerns.

RBI also retained its GDP growth forecast at 7.6 percent, on the assumption of a normal monsoon and a boost to consumption through the implementation of the Seventh Pay panel recommendations.

Rajan welcomed the government move to amend the RBI Act to create a monetary policy committee, saying it will further strengthen the policy s credibility.

Read more: Sensex trips 125 points ahead of RBI policy meet

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