India's Central Bank Cuts Interest Rates By 25 Basis Points


The Reserve Bank of India decided to cut its reference interest rate from 8 percent to 7.75 percent.

Since October 2011, the stance of monetary policy shifted to addressing increasing growth risks as reflected in the slowing down of the economy. The monetary policy response was, however, constrained because of inflation broadening and persisting at a level much above what is conducive for sustained growth. The risk of expectations getting entrenched in the event of a premature change in the policy stance was significant. Notwithstanding the constraints, the CRR was reduced cumulatively by 125 basis points during January-March 2012 to prepare liquidity conditions for a front-loaded 50 basis points reduction in the policy repo rate in April. However, the Reserve Bank had to pause in its policy rate reduction as the expected complementary policy actions towards fiscal adjustment and improving the investment climate did not follow, and inflation risks persisted. Nevertheless, the Reserve Bank persevered with efforts to ease credit and liquidity conditions through a 100 basis points reduction in the statutory liquidity ratio (SLR) in July and a cumulative 50 basis points reduction in the CRR during September-October.

It has been decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 7.75 per cent with immediate effect.
 
The policy actions and the guidance in this Statement given are expected to: support growth by encouraging investment; continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation; and improve liquidity conditions to support credit flow.

Reserve Bank of India | Nuno Salva | nuno.salva@tradingeconomics.com
1/29/2013 8:57:32 AM