India's central bank has cut the cash reserve ratio [CRR] for commercial banks by 50 basis points, reducing the percentage of cash they need to hold in reserve, in a move likely to inject billions of dollars into the banking system.
The Reserve Bank of India (RBI) governor Duvvuri Subbarao said on Tuesday the bank had shifted its focus towards promoting growth, while ensuring that inflationary pressures "remain contained".
However, the bank's repo rate, at which it lends to commercial banks, remained at a near four-year high of 8.50 per cent, while the reverse repo rate, that it pays banks for deposits, was unchanged at 7.50 per cent - its highest in more than a decade.
The CRR, which was last reduced more than three years ago, now stands at 5.5 per cent and is expected to pump 320 billion rupees ($6.27bn) into the banking system amid concerns about slowing growth in Asia's third-biggest economy due to a liquidity crunch.
The RBI slashed its prediction for GDP growth to 7.0 per cent from a previous 7.6 per cent, saying the economy was "decelerating" due to global financial uncertainty and the impact of the previous rate hikes.
The country’s central bank has raised interest rates 13 times since March 2010 in a prolonged battle against inflation, which hovered close to 10 per cent for most of last year.
India's inflation is now at a two-year-low of 7.47 per cent on an annual basis, mainly due to falling prices of food and vegetables, but it is still above the bank's comfort level of around five per cent.
While other developing nations from Brazil to Indonesia have cut rates to shield their economies from the global downturn, India has kept up its anti-inflationary stance.
"Based on the current inflation trajectory, it is premature to begin reducing the policy (interest) rate," the RBI governor said.
"The upside risks to inflation arise from global crude oil prices and the lingering impact of rupee depreciation," Subbarao said.
But the stock market Sensex index jumped 1.39 per cent to 16,985.3 points in expectation that the central bank would cut rates in coming months.
Although India's projected growth remains enviable by Western standards, it is too slow to fulfill government pledges of significant poverty reduction and to create enough jobs for a soaring young workforce.
The economy grew 8.5 per cent last year.
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