The Reserve Bank of India cut its key short-term rates by 25 basis points each on Tuesday to shore up faltering growth in the face of the global economic slowdown.
The repo rate, at which the Reserve Bank of India (RBI) infuses cash into the banking system, will be cut to 4.75 percent, and the reverse repo rate, at which it absorbs excess cash from banks, will be reduced to 3.25 percent, effective immediately.
The central bank cut is growth estimate for 2008/09, which ended on March 31, to 6.5 to 6.7 percent, and forecast growth of around 6 percent for 2009/10.
It said that managing large government borrowing in 2009/10 in a non-disruptive manner would be a major challenge, and said it would used a mix of monetary and debt management tools to ensure this was done smoothly.
“Large borrowings also militate against the low interest rate environment that the Reserve Bank is trying to maintain to spur investment demand in keeping with the stance of monetary policy,” the central bank said in its policy statement.
The bank rate, used by banks to price long-term loans, remained at 6.0 percent. Banks’ cash reserve requirements were also left unchanged at 5.0 percent.
Analysts polled by Reuters were almost evenly split over whether the central bank would cut rates or not. Six out of the 11 analysts polled expected the bank to bring down its lending rate by 25 to 50 basis points. The other five forecast the rate to be held steady.
The RBI has now cut its short-term lending rate by 425 basis points in six steps since Oct. 20 as the global economic crisis has hit Asia’s third-largest economy harder than expected.
The RBI said wholesale-priced based inflation was expected to turn negative early in the current fiscal year, but this should not be interpreted as deflation for policy purposes.
It projected WPI inflation would be around 4 percent at the end of 2009/10.
The RBI said a planned April 2009 review of the policy on foreign banks in India would now not go ahead until there was greater clarity regarding stability, recovery of the global financial system and better global coordination on regulation and supervision.