India’s central bank cuts key rates, infuses liquidity (Lead)

November 1st, 2008 - 5:14 pm ICT by IANS  

Mumbai, Nov 1 (IANS) In a bid to lower the cost of borrowing for households and industry and infuse additional liquidity worth Rs.400 billion, India’s central bank Saturday cut some key interest rates and reduced the minimum cash balance for commercial banks.In the dramatic weekend announcement, the repo rate has been cut by 50 basis points to 7.5 percent, the cash reserve ratio (CRR) stands lowered by 100 basis points to 5.5 percent and the statutory liquidity ratio (SLR) has been cut by 100 basis points to 24 percent.

The repo rate is the interest charged by the central bank on borrowings by commercial banks, the cash reserve ratio is the minimum cash they have to retain, while SLR is the amount that these institutions have to maintain as government securities.

The repo rate cut takes effect Nov 3, the lower cash reserve ratio is to be implemented in two equal stages - from week ended Oct 25 and week ending Nov 8 - and the SLR will be affected from the fortnight beginning Nov 8.

These measures were immediately welcomed by the corporate sector, which hoped commercial banks would lend more and reduce their interest rates to help the Indian industry put its investment plans back on track.

For households, the steps could eventually result in lower interests on loans for buying homes and consumer durables.

“Prudent regulatory surveillance and effective supervision have ensured that our financial sector has been and continues to be robust,” the Reserve Bank of India (RBI) said in a statement.

“However, the global financial turmoil has had knock-on effects on our financial markets. This has reinforced the importance of focusing on preserving financial stability,” the statement added, giving the rationale behind Saturday’s move.

With the cut in cash reserve ratio, the central bank hopes to add additional liquidity worth Rs.400 billion (Rs.40,000 crore, or $8.5 billion).

“With this, not only the interest rates would subside but enough liquidity come into the market to help India Inc. expand, diversify and modify its plans,” said a statement by the Associated Chambers of Commerce and Industry (Assocham).

“These are timely, coming on the back of a sharp increase in overnight lending rates and serious concern about the availability of credit at reasonable rates,” said the Confederation of Indian Industry (CII).

All apex chambers hoped commercial banks will get the signal and lower interest rates.

The central bank said it will continue to closely monitor the developments in global and domestic financial markets and take swift and effective action as warranted.

It also said it was acting as per the promise made during the mid-term review of its monetary policy for the current fiscal that it would take swift action as and when the situation demanded.

“Global financial conditions continue to remain uncertain and unsettled, and early signs of a global recession are becoming evident. These developments are being reflected in sharp declines in stock markets across the world and heightened volatility in currency movements,” the central bank said.

In the statement, the central bank also commented on the prevailing price situation and said inflation, in terms of the wholesale price index, had been softening steadily since Aug 9 and had declined to 10.68 percent for the week ended Oct 18.

“Globally, pressures from commodity prices, including crude, appear to be abating. The moderation in key global commodity prices, if sustained, would further reduce inflationary pressures.”

The RBI also said it was equally important to maintain growth, for which it was necessary to ensure that credit requirements for productive purposes were adequately met so as to support the momentum of economic expansion.

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