RBI cuts short-term lending, borrowing rates by 25 bps

The Reserve Bank on Tuesday reduced the short-term lending (repo) and borrowing (reverse repo) rates by 25 basis points, a move that will signal further cuts in lending rates by banks for retail and industrial borrowers.

In its annual credit policy for 2009-10, the RBI reduced the repo rate to 4.75 percent and reverse repo to 3.25 percent with immediate effect, while retaining other key rates like the cash reserve ratio, the percentage of deposits that banks keep with the central bank.

In view of the ongoing global economic slowdown, the central bank has pegged the economic growth rate forecast for the current fiscal to 6 percent, against 6.5-6.7 percent estimated for 2008-09.

"Any upturn in growth momentum is unlikely in view of the projected contraction in global demand during 2009, particularly decline in trade," RBI Governor D Subbarao said in the policy, adding private investment demand was expected to remain subdued.

"The policy instance of the RBI indicates further softening of interest rates," Oriental Bank of Commerce (OBC) Executive Director S C Sinha said.

The good news, however, is on inflation, which is projected to remain at around 3 percent in the medium term and 4 percent by the end of March 2010.

The RBI said that the sharp decline in crude oil prices, metals, foodgrains, cotton and cement has influenced inflationary expectations in most parts of the world including India.

"This (declining prices) is also reflected in the domestic Wholesale Price Index (WPI) inflation reaching close to zero," the RBI said.

Noting that inflation is likely to be in negative territory in the early part of 2009-10, the RBI said "expected negative inflation has only statistical significance and is not a reflection of demand contraction as is the case with advanced economies ... and may not persist beyond the middle of 2009-10".

The RBI further said that negative inflation "should not be interpreted as deflation for policy purposes".

As far as reduction in key rates is concerned, it is the sixth time that the RBI cut the repo rate and the fourth time the reverse repo rate since the collapse of America's investment banker Lehman Brothers in mid September 2008.

The central bank has reduced the repo rate by 4.25 percentage points and the reverse repo rate by 2.75 percentage points since then.

Even as the RBI retained the CRR this time, it has injected close to Rs 4,00,000 crore into the system after Lehman Brothers was declared bankrupt.