RBI cuts repo, reverse repo rates by 100 basis points, fiscal stimulus seen

It is the third rate cut by the RBI in less than two months.

The bank, however, left CRR (cash reserve ratio or the proportion of deposits banks need to keep with the central bank) and Statutory Liquidity Ratio (SLR) unchanged.

The latest move brings down repo rate to 6.5 percent and the reverse repo rate to 5 percent, its lowest in more than three years. The RBI has held the reverse repo rate steady at 6 percent since July 2006.

The last time the central bank moved to ease tight liquidity conditions was in November 1 when it slashed repo rate by 50 basis points to 7.5 percent and CRR by 100 basis points to 5.5 percent.

The RBI has been under tremendous pressure to maintain financial stability and ease the credit crunch that has roiled the domestic financial market for the past few months.

The latest decision comes a day after the government cut state-set domestic fuel prices by 10 percent and two days after the latest government data showed that inflation rate had fallen to a seven month-low level of 8.40 percent.

In a press conference, RBI Governor D. Subbarao acknowledged that "there is evidence of economic activity slowing down" though the economic impact of the ongoing global financial crisis and the recent terror attacks in Mumbai, which left nearly 200 people dead, was difficult to estimate.

"Industrial activity, particularly in the manufacturing and infrastructure sectors, is decelerating," Subbarao said.

However, the RBI governor said the central bank is keeping a close watch on global and domestic markets and is optimistic that the economy would soon return to robust growth track.