Reserve Bank's decision to cut interest rates will stimulate investment and help in anchoring inflationary expectations, Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said here today.
"RBI has taken a very balanced view. This will ensure that stimulus is provided to growth while continuing efforts to contain inflation. The RBI will cut rates if inflation behaves as per its projection," Rangarajan told PTI.
Rangarajan pegged inflation during 2013-14 fiscal at 6%, lower than one percentage point from 7.18% in December 2012.
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% to 7.75% and Cash Reserve Ratio (CRR) by similar margin to 4%, releasing Rs 18,000 crore primary liquidity into the system.
While repo rate cut will reduce the cost of borrowing for individuals and corporates, CRR which is the portion of deposits that banks have to park with RBI, would improve the availability of funds.
The RBI, however, has reduced the growth projection for the current financial year to 5.5% from its earlier estimate of 5.8%.
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On inflation, it moderated the rate to 6.8% for March-end from earlier projection of 7.5%.
It, however, expected that inflation would remain range bound around current levels due to persistent food inflation and pass through of diesel price adjustments.
With industrial output contracting by 0.1% in November, the industry had stepped up its demand for interest rate cut by the RBI in its policy review.