The Reserve Bank of India (RBI) cut its repo rate by 25 basis points to 6.50 percent at a policy review on Tuesday, making a widely expected first reduction since September to bring the rate to its lowest in more than five years.
But in a surprise move, the RBI also raised the reverse repo - or the rates lenders charge to the central bank - by 25 basis points to 6.0 percent, while taking measures to ensure more availability of cash in the banking system.
The RBI had cut its repo rate by 125 basis points last year, and most analysts had anticipated a further reduction as inflation has slowed and the government's 2016-17 budget kept borrowing and spending in check.
But banks, complaining of tight cash conditions, have only lowered their lending rates by around 60 bps, preventing the RBI's rate cuts from feeding through to the broader economy.
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