New Delhi : After nearly two years of tight check on money supply to tame inflation, India’s central bank took steps Tuesday to infuse more liquidity in the system by reducing a key rate in a bid to help industry out of the current downturn.
The cash reserve ratio (CRR), the amount against deposits which commercial banks have to keep as liquid assets such as cash, has been lowered by 50 basis points to 5.5 percent from 6 percent.
“This step will release Rs.320 billion into the system,” Reserve Bank of India (RBI) Governor D. Subbarao said in a statement, soon after presenting the third quarter review of the monetary policy for the current fiscal year.
“The policy actions and the guidance are expected to ease liquidity conditions, mitigate downside risks to growth and anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation,” he added.
For the past two years, the central bank had been taking steps to curb liquidity with a mix of measures such as hikes in the short-term lending and borrowing rates to contain inflation that had risen to double digits with food inflation at 20 percent once.
In the mid-quarter review of the monetary policy in December, the central bank had hit the pause button on rate hikes while also indicating that it may ease the tight money policy regime if the inflation were to moderate further.
India’s annual rate of inflation currently stands at a two-year low of 7.47 percent for December. Food inflation has been in the negative for the past three weeks, giving some comfort to policy-makers.
In the monetary policy review, the central bank also lowered its growth projection for the current fiscal to 7 percent from 7.6 percent earlier, while retaining its forecast on inflation at 7 percent by the end of March.