RBI Announces Monetary Stimulus By Reducing CRR, Repo & Reverse Repo

RBI has reduced the CRR, Repo & Reverse Repo by 50 & 100 basis points each. This was an expected move from RBI & RBI took it aggressively due to many factors like

1. Exports registered a negative growth for the two recent consecutive months, October-November 2008, for the first time since February 2002.

2. The index of industrial production (IIP) registered a negative growth of 0.4 per cent during October 2008, with the manufacturing sector registering a negative growth of 1.2 per cent, for the first time since April 1994.

3. Inflation as measured by year-on-year variations in the wholesale price index (WPI) has declined to 6.38 per cent as on December 20, 2008, down by more than half from the high of 12.91 per cent as on August 2, 2008.

4. The global financial situation continues to be uncertain. Since the official recognition of recession in the US, the UK, the Euro area and Japan, the downside risks to the global economy have increased. Concomitantly, the policy initiatives in the advanced economies are geared towards managing the recession and defusing potentially deflationary trends. The US has reduced the Federal Funds Rate to 0 - 0.25 per cent. Several other advanced and emerging economies such as Japan, Canada, Republic of Korea, Hong Kong and China too have reduced their policy rates.

Bottom Line:

On a review of current global and domestic macroeconomic situation, the Reserve Bank has decided to take the following measures:

Repo Rate

* To reduce the repo rate under the liquidity adjustment facility (LAF) by 100 basis points from 6.5 per cent to 5.5 per cent with immediate effect.

Reverse Repo Rate

* To reduce the reverse repo rate under the LAF by 100 basis points from 5.0 per cent to 4.0 per cent with immediate effect.

Cash Reserve Ratio

* To reduce the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 5.5 per cent to 5.0 per cent from the fortnight beginning January 17, 2009.


Source: RBI