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RBI Cuts Short-Term Interest Rates
06 December 2008

Mumbai: The Reserve Bank of India on Saturday announced sizable cuts in its key short-term interest rates, sending a signal to banks to bring down lending rates as it scrambles to protect the real economy from a worsening global financial crisis.

The central bank slashed its lending rate, or the repurchase rate, for the third time since October, by 100 basis points to 6.5%.

It also cut its borrowing rate, or the reverse repurchase rate, for the first time in more than five years by 100 basis points to 5.0%.

The RBI, however, kept banks' cash reserve ratio unchanged at 5.5% and the statutory liquidity ratio at 24%.

"The reduction in repo and reverse repo rate should result in a reduction in marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms," central bank Gov. Duvvuri Subbarao said at a news conference.

He said economic growth may moderate "more than anticipated" in the current financial year that ends March 31, but didn't give a figure. The RBI estimates the economy will grow between 7.5%-8% this fiscal year as per its earlier estimate.

However, Mr. Subbarao said inflation may be significantly lower than the previously estimated 7% for the financial year.

India's inflation rate eased to 8.40% in the week ended Nov. 22 from 8.84% in the previous week, the government said Thursday.

The Indian government on Friday cut retail gasoline prices by INR5 a liter and diesel by INR2 a liter.

"The fuel price cut will lower headline inflation by 40-45 basis points," the governor said.

The rate cuts come after Prime Minister Manmohan Singh took over the additional charge of the finance portfolio in a ministerial reshuffling in the wake of last week's terror attacks in Mumbai.

Mr. Subbarao has been easing monetary policy since October, joining global peers in pumping cash as credit markets freeze. The credit crisis has deprived companies and consumers of much needed funds.

"The repo rate adjustment we did over the last few months and the repo rate adjustment and reverse repo rate adjustment done today are intended not so much for liquidity management, but to signal the final lending rates for banks, and we hope that they will take the signal," Mr. Subbarao said.

With the latest cuts, the RBI has lowered its repo rate by 250 basis points, the reverse repo rate by 100 basis points, the cash reserve ratio by 350 basis points and the statutory liquidity ratio by 100 basis points since mid-September, when the global credit crisis deepened dramatically with Lehman Brothers' bankruptcy filing.

The central bank has also come out with more leeway for banks to lend to real estate and non-banking finance companies, which have been among the worst hit by the credit crunch. "The recent RBI moves are extremely positive. Though a repo rate cut doesn't lower the cost of funds, we as end users, will stand to benefit as we expect the banks to reduce their lending rates," Keki Mistry, managing director at Housing Development Finance Corp., said in a television interview.

India's economy expanded 7.6% in the second quarter of the fiscal year, its slowest pace in almost four years after growing at 7.9% in the April-June quarter. It has averaged growth of over 9% in the last three fiscal years.

The slowdown in growth is evident in early indicators such as exports and vehicle sales.

India's merchandise exports declined 12.1% in October from a year earlier to $12.8 billion, the first drop in three years.

Source : Sify News

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