Apparel exporters from Tirupur have welcomed the reduction of repo rate by 0.25 per cent. However, they say the interest rate cut would be helpful to quote competitive rates and sustain in the global market only when banks pass on the measures to small and medium enterprises and exporting units.

The reduction in the interest rate comes at a time when there is no sign of a decisive economic recovery in the global market and when there is continued deceleration in China’s economy. Key policy rates have been reduced by 25 basis points from 7.5 per cent to 7.25 per cent with immediate effect and at the same time Cash Reserve Ratio has been kept at four per cent of net demand and time liabilities.

The repo rate is the rate at which Central Bank of a country lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. In the event of inflation, central banks increase the repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.