RBI surprises, cuts CRR, repo rates by 25 bps today

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The Reserve Bank of India cut its key repo rate to 7.75 per cent. (Reuters) The Reserve Bank of India cut its key repo rate to 7.75 per cent. (Reuters)
SummaryRBI made the first cut in 9 mths to support an economy headed for slowest growth in decade.

liquidity and help in catalysing growth."

Planning Commission Deputy Chairman Montek Singh Ahluwalia said the CRR cut will have impact on long term interest rates.

"I think this is the right thing to do at this point of time given that (the decline) in economy is beginning to bottom out," he said.

The repo rate, which was cut last in April 2012, stands revised at 7.75 per cent, while the liquidity infusing CRR stands at 4 per cent effective February 9. CRR was last reduced by 0.25 per cent in November 2012.

Supporting the government's recent reform push, RBI said measures like opening up the FDI in some sectors and moves towards fuel price deregulation should put the economy back on the high growth trajectory and spur investment inflows.

"It is critical now to arrest the loss of growth momentum without endangering external stability," RBI said, adding that a rising current account deficit (CAD) could threaten macroeconomic stability and impact growth.

"Large fiscal deficits will accentuate the CAD risk, further crowd out private investment and stunt growth impulses," RBI said.

Yesterday, the RBI had left everyone guessing with a hawkish policy stance in the third quarter macroeconomic and monetary development report stating that sticky inflation and widening fiscal and current account deficits limited its scope for a rate cut.

Following are the highlights of the RBI's third quarter monetary policy review:

* Short-term lending rate or repo rate reduced by 0.25 pc to 7.75 pc, first time in nine months.

* Reverse repo rate stands adjusted to 6.75 pc.

* Reduces cash reserve ratio (CRR) by 0.25 pc to 4 pc.

* CRR cut to infuse Rs 18,000 crore in system from Feb 9

* RBI trims growth for fiscal 2012-13 to 5.5 pc from 5.8 pc.

* Policy action aimed at aiding growth by encouraging

investment and improving liquidity to support credit flow.

* Review intends to contain inflation and anchor inflation

expectations.

* RBI says inflation has come off its peak.

* Revises downward March-end inflation projection to 6.8 pc

from 7.5 pc.

* Q3 CAD likely to widen beyond 5.4 pc of GDP.

* Bank rate stands adjusted to 8.75 per cent with immediate

effect.

* Next mid-quarter review of monetary policy on March 19.

COMMENTARY

(Reuters): RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE

"It is a timely reduction in the repo rate by the central bank though markets are swiftly likely to look beyond the priced-in move and focus on the policy guidance. RBI has not abandoned its cautious stance, stressing on

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