RBI cuts interest rates by 50 bps

RBI cuts interest rates by 50 bps

Mumbai: The Reserve Bank of India (RBI) cut its short-term lending and borrowing rates by 50 basis points each, saying the country’s growth trajectory had been hit more than expected by the global financial crisis and downturn. After market hours, RBI said it was lowering the repo rate, at which it lends to banks, to 5% from 5.5%, effective immediately.

It also cut the reverse repo rate, at which absorbs excess cash from the banking system to 3.5% from 4%, effective immediately.

The bank said while Indian financial markets were orderly, the country’s growth prospects had taken a hit from the global financial crisis and subsequent economic downturn.

This impact has turned out to be deeper and wider than anticipated earlier, RBI said in a statement.

Policy makers expect India’s economy to grow at a six-year low of 7.1% in the 2008-09 fiscal year that ends on 31 March, after growing at or above 9% in the previous three years. Analysts expect the economy to slow further in 2009-10.

“This may be the last rate cut for some time now, and the central bank will wait for incoming data and until the new government assumes office," said A. Prasanna, economist at ICICI Securities in Mumbai.

National elections are being held in stages over April and May.

RBI said that the reduction in rates should further encourage banks to provide credit for productive purposes at viable interest rates. At a policy review in late January, it held rates steady, saying banks were yet to pass on earlier cuts.

“Markets were looking forward to this and there should be a mild upward reaction for a day or two, but then investors will start worrying about the next trigger," said Deepak Jasani, head of retail research at HDFC Securities.

Wednesday’s cuts take the cumulative reduction in the repo rate to 400 basis points in five moves since mid-October. The reverse-repo rate has been cut by 250 basis points in three moves since early December.

As well, the bank has cut banks reserve requirements and made extra funds available to keep markets fluid and credit flowing.

“RBI on its part would continue to maintain ample liquidity in the system," it said.