The Reserve Bank of India (RBI) has slashed the repo rate by 25 bps to 7.75%. The reverse repo rate will also be adjusted to 6.75% from 7%. It has also announced a cut in CRR by 25 bps to 4%, effective February 9, 2013.
The rate cut, first in nine months, is likely to encourage banks to reduce their lending rates.
The CRR cut is expected to infuse Rs 18,000 crore of liquidity into the banking system.
The central bank has revised the inflation target for March 2013 to 6.8% versus 7.5% earlier.
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Multimedia | Editor's Take: RBI Q3 Monetary Policy Review
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Also See | Third Quarter Review of Monetary Policy 2012-13 (Full Text)
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As per expectations of analysts, a moderation in inflation has provided the RBI with an opportunity to ease the rates. It now hopes to act in conjunction with the govt to support growth. "Even though inflation has peaked, further inflation going into the next fiscal is likely to be muted," said Governor, Dr D Subbarao, while annoucing the measures. It could remain rangebound around the current levels.
Investment outlook is still lacklustre. Liquidity conditions are still tight, although CRR was cut in September and October, and carried out Open Market Operations, the average borrowing has been above RBI's comfort. This could affect credit outflow to productive sectors, Subbarao said.
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Fiscal deficit reduction not necessarily contractionary: RBI
The Reserve Bank of India (RBI) does not necessarily see steps taken to reduce the country's fiscal deficit as contractionary, its governor Duvvuri Subbarao said on Tuesday.
"I do not see fiscal deficit reduction as necessarily contractionary. Indeed, it might be growth enhancing," Subbarao said in a post-policy conference with reporters.
RBI for deposit rates as high as possible to generate savings
Subbarao has said the bank wants deposit rates to stay as high as possible to generate savings even as it wants lenders to lower lending rates.
India's consumer price inflation remains high but if the impact of food prices is removed it is at 8 per cent, he said.
India's annual consumer price inflation accelerated to 10.56 per cent in December from the previous month. Food items contribute 49.71 per cent to the index.
The RBI chief said the simultaneous cut in the repo rate and the cash reserve ratio was to ensure transmission of monetary policy action into lending rates.
'New bank licence guidelines in final stage'
The central bank is close to finalising the guidelines for new bank licences, Subbarao said.
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The RBI has responded to the government's recommendations, and is awaiting New Delhi's response on the points raised by the RBI, Subbarao said.
Meanwhile, Prime Minister's economic advisor C Rangarajan has said the RBI could make more cuts to the repo rate if inflation remains on projected lines. (Reuters)
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"With headline inflation likely to have peaked and non-food manufactured products inflation declining steadily over the last few months, there is an increasing likelihood of inflation remaining range-bound around current levels going into 2013-14," RBI said in its third quarter review of monetary policy for FY13.
"This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks. The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits," it added.
The banking regulator said its monetary policy actions are likely to support growth, anchor medium-term inflation expectations and improve liquidity conditions.
Global risks may spillover into the Indian economy via trade. Large fiscal deficit to stunt growth impulses and crowd out private investment, which is a concern, said the governor of RBI.
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