New Delhi - In an effort to increase liquidity and boost a slowing economy, the Reserve Bank of India (RBI) Saturday cut two key short term lending rates by 1 percentage point each. The central bank reduced the interbank lending rate by 100 basis points to 6.5 per cent.
The reverse repo rate, at which the RBI borrows money from the banks, was also reduced by 100 basis points to 5 per cent.
Both rates would be effective from Monday, bank governor D Subbarao said.
The federal bank also announced several measures aimed to help small- and medium-size enterprises, exporters and the realty sector with credit flow problems.
The bank's announcement came a day after the government reduced fuel prices for the first time in nearly two years in a move aimed at reducing inflationary pressures on the economy.
Inflation, pegged to a wholesale price index also dropped to 8.4 per cent during the week ending November 22 compared to the preceding week's 8.84 per cent, making it easier for RBI to go for rate cuts.
Subbarao said there was evidence that the global recession was impacting India and economic activity was slowing down.
He said the rate reduction would enable banks to improve flow of credit to productive sectors of the economy on viable terms.
The Indian economy has seen a growth rate of over 9 per cent for two successive years, but the projection for the current financial has been lowered to 7.5 to 8 per cent.
Industrial activity, particularly in manufacturing and infrastructure, had decelerated, Subbarao said, and exports declined in absolute terms in October for the first time in seven years.
"The services sector too, which has been our prime growth engine for the last five years, is slowing, mainly in construction, transport and communication, trade, hotels and restaurants sub- sectors," the RBI said in a statement.
Among the measures announced by the RBI governor on Saturday is a special refinancing package of 70 billion rupees (about 1.4 billion dollars) for the small enterprise sector.
Subbarao said a similar refinance facility was being worked out for the housing sector and would be announced later in this month.
The government is expected to announce a separate stimulus package for the realty, export, infrastucture and the auto sectors within a few days.
The RBI governor said the measures taken since mid-September had released liquidity worth 300 billion rupees (about 60.2 billion dollars) in the financial system.
"The cumulative impact of the measures in today's package, together with earlier measures, should be to step up demand and arrest growth moderation," Subbarao said.
"Central Banks around the world are responding to the developments by aggressive and unconventional injection of liquidity, monetary easing and relaxation of collateral norms and eligibility criteria for their lending to financial institutions."
Subbarao said the fundamentals of the Indian economy continued to be strong and once the crisis passed, economic activity would recover sharply. "But a period of painful adjustment is inevitable," he said.
However, current indications were that the global recession would be deeper and the recovery longer than earlier anticipated, he said.
