The Reserve Bank of India (RBI), India's central bank left interest rates on hold yesterday in a bold attempt to curb the country's runaway inflation.
The RBI left its policy repo rate unchanged at 8.5 per cent for the second time since its last review. However, it lowered the cash reserve ratio (CRR) from 6 per cent to 5.5 per cent, in an attempt to ease tight liquidity in the country's banking system. CRR is used to control the money supply and regulate the lending capacity of banks.
"In reducing the CRR, the Reserve Bank has attempted to address the structural pressures on liquidity in a way that is not inconsistent with the prevailing monetary stance," the central bank said.
"In this context, the CRR is the most effective instrument for permanent liquidity injections over a sustained period of time. The reduction can also be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them."
Economists said the move is a signal the government is on a major mission to boost the country's growth. "It was a sensible move, the RBI did what it should have done - it addressed the looming liquidity crisis," said Arun Singh, senior economist at Dun and Bradstreet.
"This to me means the RBI is clearly signalling it is concerned about growth and inflationary pressures and has decided to act."
The Indian government has long been concerned about rising inflation caused by fuel prices, growing fiscal deficit and the rupee's depreciation, experts said.
"The CRR paints a more accurate picture than the [interest] rate hold. Because inflation has to come down, and growth has to become a major concern, this is a first step [in] easing monetary policy," said Vaibhav Agrawal, the vice president of research, banking at Angel Broking.
The RBI also cut its GDP growth forecast from the previous 7.6 per cent to 7 per cent for the year ending in March.
The next rate cut is not expected until after the budget, due to be released in March.