Shedding its 9-month long hawkish monetary policy stance, the Reserve Bank today slashed its key interest rates by 0.25 per cent and released Rs 18,000 crore additional liquidity into the system to perk up growth through reduced cost of borrowing.
RBI governor D. Subbarao in the third quarter monetary policy review surprised the market by cutting short-term lending rate called repo by 0.25 per cent to 7.75 per cent and cash reserve ratio (CRR) by similar margin to 4 per cent, releasing Rs 18,000 crore primary liquidity into the system.
While repo rate cut will reduce the cost of borrowing for individuals and corporates, the reduction in CRR, which is the portion of deposits that banks have to park with RBI, would improve the availability of funds.
“The stance of monetary policy in this review is intended to provide an appropriate interest rate environment to support growth as inflation risks moderate,” Subbarao said while unveiling the policy review.
The RBI, however, has reduced the growth projections for the current financial year to 5.5 per cent from its earlier estimate of 5.8 per cent. On inflation, it moderated the rate to 6.8 per cent for March-end from earlier projection of 7.5 per cent.
“The moderation in inflation conditions provides theopportunity for monetary policy to act in conjunction with fiscal and other measures to stem growth risks,” Subbarao said.
He praised government’s recent reform measures including liberalisation of FDI in retail, deferment of GAAR and progressive deregulation of fuel prices saying these actions would “help engender stable macroeconomic conditions and return the economy to its high growth trajectory.”
Stock market celebrated the rate cut with a 91 point rally in early trade to take the benchmark Sensex to 20,194.06
Planning commission deputy chairman Montek Singh Ahluwalia said the CRR cut will have impact on long term interest rates.
“I think this is the right thing to do at this point of time given that (the decline) in economy is beginning to bottom out,” he said.
On the possible impact of the RBI’s decision on the interest rates, Bank of India executive director N. Seshadari said most of the banks will transfer the rate cut. “Full transmission will happen on both lending and deposit rates. A 0.25 per cent cut is most likely.”
Echoing similar views, Canara Bank executive director A.K. Gupta said the bank would consider interest rate cut in the light of RBI policy action.
The repo rate, which was cut last in April 2012, stands revised at 7.75 per cent with immediate effect, while the liquidity infusing CRR stands at 4 per cent effective February 9.
Yesterday, the RBI had left everyone guessing with a hawkish policy stance in the third quarter macroeconomic and monetary development report stating that sticky inflation and widening fiscal and current account deficits limited its scope for a rate cut.