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India’s central bank in first rate cut since April to kick-start economy
January 29, 2013 , 8 : 37 pm
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Duvvuri Subbarao, Reserve Bank of India governor
India's central bank cut interest rates for the first time in nine months yesterday and lowered the amount of cash banks must keep in reserve as it looks to boost investment and kick-start the flagging economy. But while responding to demands from the government and business leaders for lower borrowing costs, the Reserve Bank of India (RBI) ruled out deeper cuts as inflation remained too high for comfort.
"Inflation pressures appear to have peaked. Economic activity has slowed and it needs new investment," RBI governor Duvvuri Subbarao said in a statement, which he read on television.
He added that there was "limited" room for large cuts this year.
"There is an increasing likelihood of inflation remaining rangebound around current levels going into 2013-14. This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks," Subbarao said.
Economists had widely expected the cut of 25 basis points that will see the benchmark repo rate, at which the RBI lends to commercial banks, fall to 7.75 per cent.
The bank also cut its cash reserve ratio (CRR) — which determines the amount of cash banks must keep aside — by 25 basis points to 4.0 per cent. The move will inject Rs180 billion ($3.3 billion) into the banking system, encouraging commercial banks to lend, Subbarao said.
Analysts said Tuesday's moves would provide a trigger for investment and growth, but said future rate cuts would depend on whether the government continues a recent pro-market reform drive and efforts to cut subsidies. "Tuesday's moves are a beginning," Shubhada Rao, chief economist with private Yes Bank told AFP.
The RBI will eye the government's federal budget later next month to decide on a future course of action, she said. The Congress-led government has introduced a string of new measures since September to encourage foreign investment in key sectors of the economy and reduce its subsidies, which have led to a ballooning fiscal deficit.
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