The key policy rates are cut by 25 basis points to 6.50%, by the Reserve Bank of India (RBI) during its first monthly monetary policy of the new financial year.

With effect from the fortnight starting April 16, 2016, the lowest daily maintenance of the cash reserve ratio (CRR) has been abridged from 95% of the requisite to 90% by RBI, while keeping the CRR unaffected at 4.0% of net demand and time liabilities.

The high deposit rates in the banking system have been a major reason banks have been tentative to cut lending rates until now. Banks cannot cut their lending rates without reducing deposit rates since it will hit their margins. However, due to relatively higher returns on small savings schemes as well as post office deposits, deposit rates couldn’t be reduced.

After the policy had been declared, RBI Governor Raghuram Rajan said that the RBI has cut 150bps since last January, the beginning of the accommodative cycle. The RBI stated that it will continue to give liquidity as needed but gradually lower the average ex-ante liquidity deficit in the system from 1% of NDTL to a position closer to neutrality.

“The introduction of the Marginal Cost of Funds based Lending Rate (MCLR) since April 1 will help. This is important because it means that a further rate cut even before today’s rate cut, the borrowing cost is significantly cheaper and will continue to do so,” Rajan said. He said that the apex bank’s focus will remain on the transmission of the rate cuts.

Before heading and cutting deposit and loan rates, banks have also been keeping an eye eagerly on the result of the monetary policy. This is despite a 1.3% reduction in the small savings scheme interest rates announced recently.