RBI slashes key interest rates, CRR to boost investment, spending

The Reserve Bank of India (RBI) has slashed both its short-term lending rate or repo rate and the reverse repo rate (the rate at which the central bank absorbs excess cash from the system) by 100 basis points (bps) each, effectively bringing down the key interest rates to 5.5 percent and 4 percent respectively.

The cash reserve requirement (cash reserve ratio or CRR or the proportion of deposits banks need to keep with the central bank) has also been brought down by bps to 5 percent.

While the reductions in repo and reverse repo rates will be effective immediately, the CRR reduction will be effective from the fortnight beginning January 17, 2009.

Though India's financial sector has shown resilience in the face of global financial turmoil that is so deep and pervasive yet "the financial crisis and the follow-on global economic downturn" has impacted the nation's "growth trajectory," the central bank said in a release.

"This impact has turned out to be deeper and wider than earlier anticipated. Concurrently, because of global developments coupled with supply and demand management measures at home, inflation is on the decline," it said.

"On a review of current global and domestic macroeconomic situation," the apex bank said it has taken the decision to adjust its "policy stance from demand management to arresting the moderation in growth."

"The reduction in the policy interest rates and the CRR," it said, "will further enable banks to provide credit for productive purposes at appropriate interest rates" and assist India's economic activity to "recover sharply."

The Reserve Bank on its part would constantly monitor "the global developments and the domestic economic situation" and "continue to maintain a comfortable liquidity position in the system," it added.

In December, the RBI slashed its key interest rates, bringing down repo rate and the reverse repo rate by 100 bps each, in its effort to "arrest the downturn and revive the growth momentum."

In November, the apex bank had brought down CRR by 100 bps to 5.5 percent.

The latest move, market analysts said, would help inject Rs.20,000 crore into the financial system.

The latest fillip to interest rates sends the proper signals to the market and the benefits of lower interest rates could be passed on to both industry as well as consumers, they said.

Taking into account the latest measures, they added, the central bank has injected so far over Rs.320,000 crore ($66 billion) into the system to ease credit freeze and boost economic growth.

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, in recent months, lowered their estimates for India's GDP growth for the current fiscal year ending March 2009 to 6.5-7.5 percent.

India's exports contracted 9.9 percent in November from a year earlier, the second consecutive fall after a 12.1 percent dip in October and a key manufacturing index contracted sharply in December, indicating the slowdown was spreading.

The apex bank's move comes close on the heels of inflation cooling down in India. According to the latest government data, India's annualized inflation rate had come down from a high of 12.91 percent in August last year to 6.38 percent as on December 20.

The move also follows rate cuts implemented by central banks from the US to South Korea to stem global economic slowdown.