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India's central bank eases money supply but rates unchanged

Posted on Oct 30, 08:38PM | 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 and 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."

In September, the RBI had cut the CRR by a similar 25 basis points, releasing Rs.17,000 crore into the system.

The policy announcements hit market sentiments with the sensitive index (Sensex) of the Bombay Stock Exchange falling 163.78 points, or 0.88 percent to 18,472.04 points.

The index at one point touched a low of 18,426.46 points, down 209.36 points, in intra-day trade.

Meanwhile, industry body Confederation of Indian Industry (CII) welcomed the cut in CRR, and hoped that the steps being taken by the government to contain fiscal deficit will give the RBI reasons to cut key lending rates.

"This (CRR rate cut) would help the liquidity position and also sends a signal that the RBI is softening its stand on the monetary side," Chandrajit Banerjee, director general of CII, said.

"With the government having started action on containing fiscal deficit, CII hopes that the RBI would intervene sooner than later to cut repo rates."

However, a disappointed Finance Minister P. Chidambaram said: "Growth is as much a challenge as inflation. If the government has to walk alone to face the challenge of growth, then we will walk alone." He was referring to the RBI's stance of reining in inflation before changing key rates to revive flagging growth.

A day before, Chidambaram had pledged to nearly halve the 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.

"The government is doing its best to send a clear message that we are on the path of fiscal consolidation. It is my hope that every one will read and understand the government's commitment to the path of fiscal consolidation," he said.

"I haven't read the last few paragraphs of the statement but if it holds out hope for the future, I look forward to that future. Some times it is best to speak, some times to remain silent; this is the time for silence," Chidambaram added Tuesday.

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