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India's central bank eases money supply but rates unchanged

Posted on Oct 30, 12:02PM | IANS

The Reserve Bank of India (RBI) Tuesday cut a key policy ratio by 25 basis points to release Rs.175 billion into the system for lending, but left policy rates unchanged, hoping this will push growth but also keep inflation under check.

The cash reserve ratio, or the money against deposits which commercial banks have to retain in the form of liquid assets such as cash, has been cut to 4.25 percent from 4.5 percent at present. All the other policy rates and reserve ratios were, however, kept unchanged.

These changes were effected during the second quarter review of the monetary policy for this fiscal conducted by RBI Governor D. Subbarao at the central bank's headquarters at Mint Street in downtown Mumbai.

"The reduction in the cash reserve ration is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth," Subbarao said, explaining the rationale of policy action Tuesday.

"The persistence of inflationary pressures even as growth has moderated, remains a key challenge. In this respect, India is an exception to the global trend, which underscores the role of domestic structural factors."

The market sentiments, accordingly, were hit and the sensitive index (Sensex) of the Bombay Stock Exchange fell to 18,506.83 points, immediately after the policy review, to log an intra-day loss of 128.99 points, ot 0.69 percent.

A day before the review, the central bank had said in its formal assessment of macro-economic and monetary developments for the July-September quarter, that inflation was likely to persist for some time.

It revised upward its projection for inflation based on wholesale prices to 7.7 percent from the earlier estimate of 7.3 percent and lowered the forecast of country's economic growth for this fiscal to 5.7 percent from the 6.5 percent earlier.

The policy review also came against the backdrop of Finance Minister P. Chidambaram pledging to nearly halve India's fiscal deficit by March 2017, while hoping the central bank would ease monetary policy taking into account the recent reform measures to help economic growth.

Following are the new policy rates and reserve ratios:

Bank rate: 9 percent

Repurchase Rate: 8 percent

Reverse Repurchase Rate: 7 percent

Marginal Standing Facility Rate: 9 percent

Cash Reserve Ratio: 4.25 percent

Statutory Liquidity Ratio: 23 percent