India’s central bank cuts key rates to spur economy

January 2nd, 2009 - 7:04 pm ICT by IANS  

Mumbai, Jan 2 (IANS) In a bid to lower the cost of borrowings for commercial banks, the Reserve Bank of India (RBI) Friday cut the both the repurchase and reverse-repurchase rates by 100 basis points each, while reducing the cash reserve ratio (CRR) by 0.5 percent points.“The reduction in the CRR will inject additional liquidity of around Rs.20,000 crore (Rs.200 billion/$4 billion),” the central bank said in a statement, while announcing a further monetary stimulus to prop the economy.

“It is expected that the reduction in the policy interest rates and the CRR will further enable banks to provide credit for productive purposes at appropriate interest rates,” the central bank added.

The repo rate, currently at 6.5 percent, is the interest charged by the RBI on borrowings by the commercial banks. A reduction in the same lowers the cost of borrowings 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 five percent, makes it less lucrative for banks to park funds with the central bank.

“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 would recover sharply,” said the central bank.

“But a period of painful adjustment is inevitable.”

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