India has lowered interest rates for the first time since April 2012 and reduced the amount of deposits that lenders are required to set aside as reserves. The Reserve Bank of India (RBI) cut the repurchase rate from 8% to 7.75% and the cash reserve ratio (CRR) from 4.25% to 4%, effective from 9 February.
The move, which makes India the first major Asian economy to lower its borrowing costs this year, will release an estimated 180bn rupees (IR) into the country’s banking system for lending. It comes in response to an easing of inflationary pressures as well as progress made by the government in reducing the country’s budget deficit.
India’s wholesale price index, the main bellwether of inflation, fell to an eleventh-month low of 7.18% in December. The RBI, which has been under pressure to stimulate the economy, said that the improvement “provides space, albeit limited, for monetary policy to give greater emphasis to growth risks”. The bank also forecast that it now expects the rate to ease further to 6.8% in March, compared with its earlier projection of 7.5%
India’s economy grew by 5.3% in Q312 which, although comparing favourably with rates in many Western economies, was the slowest rate of expansion in three years. The RBI has also lowered its full-year growth projection for the 2012-13 financial year to 5.5% from 5.8%, with analysts suggesting that further interest rate cuts may follow to stimulate long-term growth.
However, the central bank also stressed its continued concerns over India’s fiscal and current account deficits (CAD) and said that its pro-growth policies would reflect management of the risks that they posed. “Financing the CAD with increasingly risky and volatile flows increases the country’s vulnerability to sudden shifts in risk appetite and liquidity preference, potentially threatening macroeconomic and exchange rate stability,” the RBI commented in a statement.
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