RBI cuts CRR by 0.25%; lending rates unchanged

D SubbaraoThe Reserve Bank of India today left interest rates unchanged but cut the cash reserve ratio by 25 basis points (0.25 per cent), saying the primary focus of its policy remains containing inflation.

The RBI decision to reduce the amount commercial banks must park with the central bank will release Rs17,000 crore of primary liquidity into the system. This would ensure adequate flow of credit to productive sectors of the economy, the bank said.

Following the cut, CRR will come down to 4.5 per cent while the repo and reverse repo rates will remain unchanged at 8 per cent and 7 per cent respectively. The CRR cut would be effective from 22 September.

"As inflationary tendencies have persisted, the primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations," RBI governor D Subbarao said while announcing the mid-quarter monetary policy review.

Indian rupee and bond prices weakened immediately after the RBI announcement, with the yield on the 10-year bond rising 5 basis points from before the RBI statement to 8.17 per cent. The one-year swap rate rose 8 bps to 7.68 per cent. The Sensex also trimmed gains.

"The government's recent actions have paved the way for a more favourable growth-inflation dynamic by initiating a shift in expenditure away from consumption (subsidies) and towards investment (including through FDI)," the RBI wrote in its policy statement.