India’s central bank cuts key lending rates

December 6th, 2008 - 2:55 pm ICT by IANS  

Mumbai, Dec 6 (IANS) In a bid to lower the cost of borrowings for commercial banks and help them reduce interest rates for the corporate sector, India’s central bank Saturday cut two key interest rates but said a period of “painful adjustment” was inevitable for the country’s economy.Reserve Bank of India (RBI) Governor D. Subbarao told a press conference here that the repurchase rate, or the repo rate, was being cut by 100 basis points, while the reverse repo rate will be reduced by a similar amount.

The new rates take effect Monday.

The repo rate, currently at 7.5 percent, is the interest charged by the RBI on borrowings by commercial banks. A reduction in the same makes the cost of borrowings cheaper for commercial banks.

The reverse repo rate, on the other hand, is the rate at which the central bank borrows money from commercial banks. A lowering of this rate, presently at six percent, makes it less lucrative for banks to park funds with the central bank.

There were no changes in cash reserve ratio (CRR) and statutory liquidity ratio (SLR).

Similarly, the CRR - the minimum liquid funds banks have to keep against deposits - is presently at 5.5 percent. The statutory liquidity ratio (SLR) - the amount these institutions have to hold in government bonds - is currently pegged at 24 percent.

The rate cuts apart, the refinance facility for the Small Industries Development Bank of India (Sidbi) was being enhanced by Rs.7,000 crore (Rs.70 billion/$1.4 billion) and to the National Housing Bank (NHB) by Rs.4,000 crore (Rs.40 billion/$800 million).

“Going forward, the outlook for the Indian economy is mixed,” Subbarao told the press conference, expressing worries over the slowing down of industrial growth and the decline in merchandise exports in October.

“Confidence in global credit markets continues to be low, and credit lines remain clogged,” he said, adding: “The outlook for India going forward is mixed. There is evidence of economic activity slowing down.”

The central bank governor said there was also difficulty to precisely assess the impact of every development in the global financial system on the Indian economy but said measures will be announced from time to time to ease the pressures.

“The fundamentals of our economy continue to be strong. Once the crisis is behind us and calm and confidence are restored in the global markets, economic activity in India will recover sharply,” he said.

“But a period of painful adjustment is inevitable.”

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