India's central bank cuts lending rate to prop economy

Mumbai, Apr 17 (PTI) After a gap of three years, Reserve Bank of India (RBI) today slashed short term lending rate by 0.50 per cent to 8 per cent, a move that will reduce the cost of home, auto and corporate loans. The reduction in the repo rate at which the country's central bank lends to banks, has been prompted by a deceleration in growth and softening of inflation. The cut is aimed at spurring growth to 9 per cent levels, seen before the global financial crisis that began in 2008, RBI Governor D Subbarao said while unveiling the bank's annual monetary policy for fiscal 2012-13 here. "The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate, which, in turn, is contributing to the moderation in core inflation," the Governor said. Bank rate has been cut to 9 per cent from 9.5 per cent. RBI has pegged the GDP growth rate for the new 2012-13 that began with this month at 7.3 per cent. It is expected to be 6.9 per cent for the just concluded 2011-12. After two consecutive cuts since January, the Governor, however, retained the cash reserve ratio at 4.75 per cent. Subbarao also ruled out further reduction in policy rate in the immediate future citing persistent upside risks to inflation and possible fiscal slippages driven by higher oil subsidies. It expects the inflation to be around 6.5 per cent by March 2013. "It must be emphasised that the deviation of growth from trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates," he said. The RBI decision to cut repo rate is likely to prompt the banks to cut lending rates for home, auto and corporate loans, experts said. RBI has raised lending rates 13 times between March 2010 and October 2011 to contain inflation that had been hovering near double-digit. This had led to a clamour by industry to cut rates and spur industrial and economic growth that has slowed down considerably during the past few quarters. In order to ease tight liquidity situation, Subbarao also announced doubling the borrowing under the Marginal Standing Facility for banks to 2 per cent of their deposits with immediate effect. It also permitted banks to borrow under the MSF even if they have excess government securities holdings. On the growth front, RBI expects FY'13 to be moderately better than the fiscal just gone by. It has pegged GDP growth at 7.3 per cent, which is 0.3 per cent lower than the government projection for 2012-13. Growth in 2011-12 is seen at a 3-year low of 6.9 per cent. Even though spurring growth has taken priority, RBI continues to be worried about the inflation scenario, calling it as "challenging" due to the sharp spikes in crude prices and food articles in the recent months. Noting the moderation in manufacturing inflation, the Governor pegged the annual overall inflation target at 6.5 per cent for FY'13 (which is 0.5 per cent lower than its projection for FY'12), saying the price rise will be range-bound through the year. Inflation was the key driver that guided the Reserve Bank to tighten money supply, and later hold rates during the past 36 months. The period also saw it inflicting 13 simultaneous hikes, by 3.75 per cent in repo rates over the 19-month period, making it one of the most aggressive central banks in the world. Apart from hurting investment activity, the rate hikes severely hurt the retail borrowers as higher loan repayments put household budgets for a toss. RBI will undertake the mid-quarterly review of the monetary policy on June 18 while first quarter review is scheduled on July 31. PTI