The Reserve Bank of India on 29 January 2013 slashed its key interest rates by 0.25 per cent and released 18000 crore rupees additional liquidity into the system to perk up growth through reduced cost of borrowing. RBI in its third quarter monetary policy review surprised the market by cutting short-term lending rate called repo, by 0.25 per cent to 7.75 per cent and Cash Reserve Ratio (CRR) by similar margin to 4 per cent.
The repo rate cut will reduce the cost of borrowing for individuals and corporates, whereas the reduction in CRR, which is the portion of deposits that banks have to park with RBI, would improve the availability of funds. Unveiling the policy review in Mumbai, RBI stated that the stance of monetary policy in this review is intended to provide an appropriate interest rate environment to support growth as inflation risks moderate. CRR cut will have impact on long term interest rates.
The RBI, however, has reduced the growth projections for the current financial year to 5.5 per cent from its earlier estimate of 5.8 per cent.
On inflation, it moderated the rate to 6.8 per cent for March-end from earlier projection of 7.5 per cent. The repo rate, which was cut last in April 2012, stands revised at 7.75 per cent with immediate effect, while the liquidity infusing CRR stands at 4 per cent effective 9 February 2013.
Inflation has been the prime inhibiting factor that has prevented the RBI from cutting repo rate in the last nine months, which have seen a host of liquidity infusing measures like a cut of 1.75 per cent in CRR, government bond buybacks and a one percentage point cut in SLR.
RBI however, added the caveat stating that the stance will depend on how the government manages the risk from the twin deficits on the fiscal and current account side, and the evolving growth-inflation dynamics.
Stating that the widening current account deficit, which represents the differential between the foreign exchange earned and expended through trade and services, is a big concern, RBI said the number is expected to widen in third quarter,beyond the 5.4 percent in the preceding quarter.
RBI praised government's recent reform measures including liberalisation of FDI in retail, deferment of GAAR and progressive deregulation of fuel prices saying these actions will help engender stable macroeconomic conditions and return the economy to its high growth trajectory.
The RBI will come out with mid-quarter review on 19 March 2013 and the annual policy on 3 May 2013.