RBI unveils deep cuts in policy rates

On a review of current global and domestic macroeconomic situation, the Reserve Bank of India (RBI) decided to undertake further measures to enable banks to provide credit for productive purposes at appropriate interest rates. The central bank reduced the repo rate under the liquidity adjustment facility (LAF) by 100 basis points (bps) from 6.5% to 5.5% with immediate effect. The RBI also reduced the reverse repo rate by 100 bps from 5% to 4% with immediate effect. The cash reserve ratio (CRR) of scheduled banks will be cut by 50 bps from 5.5% to 5% from the fortnight beginning January 17.

The reduction in the CRR will inject additional liquidity of around Rs200bn to the financial system, the RBI said in a statement on its web site. The RBI said it would continue to maintain a comfortable liquidity position in the system. The central bank also said that the fundamentals of the Indian economy continue to be strong. "Once the crisis is behind us, and calm and confidence are restored in the global markets, economic activity in India would recover sharply," the RBI said. "But a period of painful adjustment is inevitable."