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India cuts key interest rate to spur economy
March 19, 2013 , 8 : 25 pm
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Duvvuri Subbarao: RBI Governor
India's central bank cut its main interest rate by 25 basis points yesterday — its second such reduction this year — in an effort to jumpstart a sharply slowing economy.
But central bankers warned that still stubbornly entrenched inflation limited the "headroom" for further rate cuts.
The Reserve Bank of India (RBI) announced it would lower the benchmark repo rate, at which it lends to commercial banks, by a quarter percentage point to 7.50 per cent in a move widely expected by economists.
Business leaders have been calling for lower borrowing costs to help the economy, which is projected to grow at just five per cent in the current financial year to March 31, the lowest pace in a decade. The bank warned that with headline inflation lower, but not yet tamed, substantial future rates cuts could not be guaranteed.
"Even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited," Reserve Bank of India governor Duvvuri Subbarao said in a statement on the bank's website after the meeting.
Indian shares fell 0.66 per cent after the announcement on worries about chances for further rate cuts. The cash reserve ratio (CRR) — the percentage of deposits banks must keep with the central bank — was kept unchanged.
While overall annual inflation rose in January, core inflation — which strips out volatile goods such as food and fuel and is closely watched by the RBI — fell to a near three-year-low of 3.8 per cent.
"We have seen a sharp drop in core inflation. The fiscal situation looks under control," said Siddhartha Sanyal, chief India economist at Barclays Capital.
"In this scenario, a rate cut had been widely expected," he had earlier told AFP.
The RBI had slashed rates by 25 basis points at its previous meeting in January — its first such move since last April.
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