In a move cheered by both economists and industrialists, the Reserve Bank of IndiaBSE 4.06 % (RBI) on Monday cut the cash reserve ratio (CRR) by 25 basis points to 4.50 per cent in its monetary policy review. The decision will infuse Rs 17,000 crore into the banking system. The liquidity infusion, RBI said, would ensure adequate flow of credit to productive sectors of the economy.

The central bank kept key interest rates unchanged, stating that the primary focus of monetary policy remains fighting inflation. The repo rate was kept status quo at 8%.

While observing that the government undertook long anticipated measures towards fiscal consolidation by reducing fuel subsidies and selling stakes in public enterprises, RBI said that the policy action has paved way for good inflation-growth dynamics.

"Steps taken to increase FDI should contribute to both greater capital inflows and, over the long run, higher productivity, particularly in the food supply chain. Importantly, however, for the moment, inflationary pressures, both at wholesale and retail levels, are still strong," the monetary policy review said.

However, sounding less hawkish, it said, "The stance of monetary policy will be conditioned by careful and continuous monitoring of the evolving growth-inflation dynamic, management of liquidity conditions to ensure adequate flow of credit to productive sectors and appropriate responses to the shocks emerging from external developments."

RBI also expressed concern over the recent easing of liquidity globally, saying it will lead to commodity prices spiking up which in turn will be detrimental for inflation management.

The RBI said the CRR cut would be effective from September 22. The moderation in CRR rate is likely to goad banks to bring down their lending rates, which will improve investments and help growth.

 

Commenting on RBI's action, State Bank of India (SBI) Chairman Pratip Chaudhuri said the bank will review its rates in the light of policy action. The asset liability committee of the bank is expected to meet soon to take a view on rate revision.

"It is a very positive move, as a mid-term policy it is very significant. I think the RBI has given a clear signal that they are willing to respond and that they have taken note of the signs of deceleration in economy," Chaudhuri said.

Basking in all-round praise for decisively attempting to rebound after months of paralysis, the government will roll out a series of policy announcements shortly to capitalise on the momentum generated by last week's sudden burst of reforms.