To Cut Or Not

The Central Bank is strongly tipped to lower its short-term discount rates by up to 100 basis points within the next few days.
Central Bank officials had intimated its thoughts to Chief Executives of commercial bank
quote s at a meeting on Thursday.

rnrnMarket sources said the Central Bank had asked the banks to cut lending rates by 1 percent and promised to lower interest rates by the same.

rnrnThe rate cut, which is likely to be announced sometime next week, will lower the reverse repo rate to 12.65 percent and the repo rate to 10.5 percent.

rnIn March the bank warned that monetary policy would remain tight, despite periodically shifting its grip on interest rates.

rnThe reverse repo-rate or the overnight reverse repurchase rate, is the rate at which primary dealers in treasury bills and commercial banks can obtain overnight funds from the Central Bank by pledging their treasury bill/bond holdings as collateral.

rnrnThe repo-rate is the key benchmark, which sets the floor in the overnight call money market, as it enables lenders to invest excess funds in treasury bills and bonds held by the Central Bank (i.e. at near zero risk).

It is also the Central Bank
quote s main instrument of signalling the expected direction of overall interest rates to the market.rn