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RBI cuts Bank Rate, CRR by 0.5 per cent

The Reserve Bank of India announced a cut in interest rates on Friday in what economists saw as a bid to help lift flagging economic growth ahead of a national budget due later this month.

The Reserve Bank of India said it was cutting the benchmark bank rate to 7.5 per cent from 8 with effect from the close of business on Friday.

It also announced a cut in banks' cash reserve ratio by 50 basis points in two stages of 0.25 percentage point each.

The bank rate is the rate at which the RBI does most of its lending to commercial banks. It is used as a reference by banks to set their lending rates.

Bond prices jumped immediately after news of the cuts, with the 10-year bond rising by a steep Rs 0.41 to Rs 106.75.

Some easing of the cost of credit had been expected ahead of the February 28 budget in order to underpin federal government efforts to revive slowing economic growth.

Economists said, however that, they were disappointed that the RBI had not been more aggressive.

"The cut was expected, but the size was well below my expectations," said Sanjit Singh, debt analyst at ICICI Securities and Finance Co.

"I had expected a 100-basis-point cut in the bank rate," he said.

"The rate cut will only help financial services and banking stocks," added Nilesh Shah, Portfolio Manager at Kotak Securities. "Stock markets are unlikely to be enthused unless domestic financial institutions buy aggressively."

The central bank had hiked both the bank rate and CRR in July to ward off pressure on the rupee.

Pressure has been growing in recent months to kick-start the economy, expected to grow by 6 per cent in 2000-01, down from 6.4 per cent a year earlier and 6.6 per cent in 1998-99.

Though good compared to global trends, the growth rate is below an average of more than 7.5 per cent hit in three straight years in the mid-1990s and far off the 10 per cent rate economists say is required to meet the needs of India's one-billion population.

Finance Minister Yashwant Sinha is expected to use the budget to try to push through reforms of India's complex tax structure and set ambitious targets for privatisation in the heavily state-run economy.

Economists said that now the central bank had delivered on a rate cut, the government in turn should be willing to keep a tight lid on spending to prevent any increase in inflation.

"It is a very good move, but the government will have to be very careful that fiscal restraint is maintained," said Arjun Sengupta at the Centre for Policy Research in New Delhi.

Indian bonds surge on bank rate, CRR cuts

Prices of Indian government bonds rose by Rs 0.4-0.5 rupees after the central bank announced cuts in its bank rate and cash reserve ratio.

Prices were up by around Rs 0.8-1.0 from late Thursday levels.

The actively traded 11.30 per cent 2010 bond was dealt at Rs 106.75 compared with Rs 106.34 ahead of the news of the cuts and Rs 105.75 late on Thursday.

The Reserve Bank of India cut its bank rate by 50 basis points to 7.5 per cent with effect from close of business on Friday.

It also said it will reduce banks' CRR to 8 per cent via two cuts of 0.25 percentage point each, to take effect from February 24 and March 10.

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CRR cut hinges on markets, says RBI

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