India’s central bank cuts key rates to infuse liquidityNovember 1st, 2008 - 3:22 pm ICT by IANS
Mumbai, Nov 1 (IANS) In a dramatic weekend announcement, India’s central bank Saturday cut some key interest rates and reduced the minimum cash balance banks have to retain against deposits in a bid to infuse additional liquidity worth Rs.400 billion and reduce their cost of borrowing.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 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.
“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).
“The Reserve Bank will continue to closely monitor the developments in global and domestic financial markets and will take swift and effective action as appropriate,” the central bank said.
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.