India's Central Bank Slashes Key Interest Rates to Spur Growth

India's central bank has lowered interest rates for the first time in nine months and reduced the amount of deposits that lenders are required to set aside as reserves.

 

The Reserve Bank of India (RBI) reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 percent to 7.75 percent with immediate effect.

 

Meanwhile, the cash reserve ratio (CRR) has been reduced by 25 basis points from 4.25 percent to 4.0 percent of their net demand and time liabilities (NDTL) effective the fortnight beginning February 9, 2013.

 

The move will release an estimated 180bn rupees (IR) into the country’s banking system for lending. It is expected to support growth by encouraging investment; continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation; and  improve liquidity conditions to support credit flow.

 

India’s wholesale price index, the main bellwether of inflation, fell to an eleventh-month low of 7.18% in December. The RBI, which has been under pressure to stimulate the economy, said that the improvement “provides space, albeit limited, for monetary policy to give greater emphasis to growth risks”. 

 

The bank also forecast that it now expects the rate to ease further to 6.8% in March, compared with its earlier projection of 7.5%

 

Although India’s economy grew by 5.3% in Q312, it was the slowest rate of expansion in three years. The RBI has also lowered its full-year growth projection for the 2012-13 financial year to 5.5% from 5.8%, with analysts suggesting that further interest rate cuts may follow to stimulate long-term growth.

 

However, the central bank also stressed its continued concerns over India’s fiscal and current account deficits (CAD) and said that its pro-growth policies would reflect management of the risks that they posed.

 

“Financing the CAD with increasingly risky and volatile flows increases the country’s vulnerability to sudden shifts in risk appetite and liquidity preference, potentially threatening macroeconomic and exchange rate stability,” said the RBI in a statement.

 

 

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