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.

"I am hopeful and confident that we will be able to return to normalcy, make an adjustment and our business and industries will continue their regular activity notwithstanding the terrorist attack," Subbarao said.

The cut in the repo and reverse repo rates, he said, "should result in a reduction in the marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms."

"We believe that the liquidity is very comfortable now, and I want to ensure the financial sector community that Reserve Bank will endeavor to maintain comfortable liquidity conditions using all the instruments available to us," he said.

The central bank, Subbarao said, would try to maintain "a comfortable liquidity position, see that the weighted average overnight money market is maintained with the repo-reverse repo corridor and ensure conditions conducive for flow of credit to productive sectors, particularly the stressed export and small and medium industry sectors."

Along with the rate cuts, the central bank took steps, Saturday, to provide refinance facility of up to Rs.7000 crore to the Small Industries Development Bank of India (SIDBI) to promote funding for small industries and, in order to increase flow of funds to the ailing real estate sector, it gave the National Housing Bank (NHB) Rs.4000 crore refinance facility and encouraged the banks to lend to the housing sector by according "priority sector" status to housing loans up to Rs.20 lakh.

The apex bank also put a cap on the cost of some export credit to boost the export industry and allowed select banks to buyback foreign currency convertible bonds (FCCBs) from customers to "take advantage of current discounted rate at which these bonds are trading."

"The cumulative impact of the measures in today's package, together with earlier measures, should be to step up demand and arrest the growth moderation," Subbarao said, adding that the central bank would take more swift action if needed.

The fundamentals of the Indian economy continue to be strong, the apex bank said. "Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India will recover sharply. But a period of painful adjustment is inevitable," it added.

India's economy grew at a robust annual rate of 9 percent or more for the past three years but global financial groups like Citigroup, JP Morgan, Goldman Sachs, Morgan Stanley and Nomura have lowered their estimates for India's GDP growth over the past one month to 6.5-7.5 percent even as India's stock market plunged over 55 percent this year and the rupee hit record low levels.

The rate cut move has brought a smile to India Inc. but has left it wanting more with industry chambers saying the government need to quickly introduce reforms to boost investor confidence and put the domestic economy on high growth trajectory.

"The central bank could have gone a step further by cutting the CRR and SLR rates to send a stronger signal of liquidity support to corporates," Federation of Indian Chambers of Commerce and Industry (FICCI) secretary general Amit Mitra said, though he described the package as a "good start in the right direction."

FICCI said the government should take steps to stimulate growth in automobiles and the white goods sector.

Agrees Chandrajit Banerjee, director general of Confederation of Indian Industry (CII). "We now expect some fiscal stimulus from the government, which would help complete the package," he said.

"The cut in rates is not enough as the economic situation calls for drastic fiscal measures," said Sajjan Jindal, president of Associated Chambers of Commerce and Industry of India (ASSOCHAM).

A senior government official said, Saturday, that the government is likely to announce a Rs.17,000 crore stimulus package for automobiles, housing and exports sectors over the weekend.

According to analysts, taking into account the latest measure, RBI has injected so far over Rs.300,000 crore ($60 billion) into the system which would help encourage corporate funding and boost consumer spending.