Shedding its 9-month long hawkish monetary policy stance, the Reserve Bank on Tuesday slashed its key interest rates by 0.25% and released Rs. 18,000 crore additional liquidity into the system to perk up growth through reduced cost of borrowing. RBI Governor D Subbarao in the third quarter monetary policy review surprised the market by cutting short-term lending rate called repo by 0.25 per cent to 7.75% and Cash Reserve Ratio (CRR) by similar margin to 4%, releasing Rs. 18,000 crore primary liquidity into the system.
While repo rate cut will reduce the cost of borrowing for individuals and corporates, the reduction in CRR, which is the portion of deposits that banks have to park with RBI, would improve the availability of funds.
"The stance of monetary policy in this review is intended to provide an appropriate interest rate environment to support growth as inflation risks moderate," Subbarao said while unveiling the policy review.
The RBI, however, has reduced the growth projections for the current financial year to 5.5% from its earlier estimate of 5.8%.