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India's central bank in first rate cut since April

January 29, 2013

The photo shows an Indian bank note. - File Photo
The photo shows an Indian bank note. - File Photo

MUMBAI: India's central bank cut its main interest rates by 25 basis points on Tuesday, in its first reduction for nine months as it seeks to kickstart the slowing economy.

The Reserve Bank of India (RBI) said the benchmark rate, at which it lends to commercial banks, would fall to 7.75 per cent.

“Inflation pressures appear to have peaked. Economic activity has slowed and it needs new investment,” RBI governor Duvvuri Subbarao said in a statement, which he read on television.

“The policy actions are expected to support growth by encouraging investment and improve liquidity conditions,” Subbarao added.

The Mumbai-based bank also cut the cash reserve ratio – which determines the amount of cash banks keep aside – by 25 basis points to 4.0 per cent.

The move would inject 180 billion rupees ($3.3 billion) into the banking system, encouraging commercial banks to lend, Subbarao said.

The RBI's rate-cut decision was widely expected by economists and business leaders, who for months have been calling for lower lending rates to help the economy, which grew at just 5.3 per cent in the quarter to September.

India's inflation eased to a three-year-low of around seven per cent in December, but is still above the bank's comfort zone of around five per cent.

China, South Korea and Brazil have all cut interest rates to shield their economies from the effects of the eurozone debt crunch.

Until Tuesday's move, the RBI had kept rates unchanged since April last year saying inflation needed to fall further and government spending needed to be curbed.

The Congress-led government has introduced a string of new measures since September to encourage foreign investment and reduce its subsidy bill which had led to a ballooning fiscal deficit.

In a report on Monday, the RBI said the reform measures announced so far have not decisively lifted business sentiment and more “action may be needed” to restore confidence.