India: Central Bank lowers interest rates to support growth
January 29, 2013
At its 29 January monetary policy meeting, the Reserve Bank of India (RBI) cut the repurchase rate by 25 basis points to 7.75%, in a move broadly expected by the market. In addition, monetary officials lowered the reverse repo rate from 7.00% to 6.75% and the cash reserve ratio to 4.00% from 4.25%. According to the Bank, the reduction in the cash reserve ratio will inject around INR 180 billion (USD 3.3 billion) of liquidity into the banking system. The decision represents the first cut in policy rates since April 2012 and the first reduction of the reserve ratio in three months.
The RBI stated that economic activity remains subdued, particularly investment and consumption, whose growth has softened somewhat this fiscal year. In addition, the slowdown in the global economy has curbed demand for India's exports.
Regarding price developments, monetary officials underlined that headline inflation continued to ease and noted that, at the current level, inflation "provides space, albeit limited, for monetary policy to give greater emphasis to growth risks". The Central Bank added that the policy guidance will be "conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits".
With this move, monetary policy authorities aim at boosting investment, anchor inflation expectations and improve liquidity conditions.
Author: Ricardo Aceves, Senior Economist