The Reserve Bank of India (RBI) cut its key policy rate and banks’ cash reserve ratio by 25 bps, signalling its intent to support the government’s efforts to bring the country’s economy back on track.
After the cut, the repo rate, the rate at which banks borrow funds from the RBI, will be 7.75 percent, and the CRR stands at 4.00 percent.
The CRR cut will inject Rs 18,000 crore into the banking system, Subbarao said today.
The RBI also cut the GDP growth forecast for the current financial year to 5.5 percent from its earlier forecast of 5.8 percent. It also cut inflation projection for the year to 6.8 percent from the earlier 7.5 percent, but said there is only limited space for inflation to move downward.
"A sustained reduction in inflation pressure is, however, contingent upon alleviation of supply constraints and progress on fiscal consolidation. This will also help mitigate the cost-push pressures stemming from the surge in wages," it said.
RBI expects headline inflation to remain rangebound at the current levels going into 2013-2014 and said this provides limited space for monetary policy to give greater emphasis to growth risks.
The central bank has been resisting a rate cut for the last nine months, even as industry and the government clamoured for one as the economic growth slowed down considerably.
“While the series of policy initiatives by the Government has boosted market sentiment, it will take some time to reverse the investment slowdown and reinvigorate growth,” it said in the report, acknowledging the government’s recent reforms measures.
The equity markets remained flat as the rate action from the central bank came in as expected.
Reacting to the policy statement, Prime Minister's Economic Advisory Council (PMEAC) Chairman C. Rangarajan said going ahead more rate action will be dependent on how inflation will move henceforth.
Rangarajan also expects inflation to fall by 1 percentage point by next fiscal.
Read the full statement here.