RBI cuts lending rate by 50 basis points to 8 per cent to prop economy; loans to become cheaper

Reserve Bank of India in its annual monetary policy review on Tuesday slashed short term lending rate (repo rate) by 50 basis points to 8 per cent. The move that comes after a gap of three years is set to reduce the cost of home, auto and corporate loans.

The central bank, however, kept the cash reserved ratio (CRR) unchanged.

The reduction in the repo rate at which RBI lends to banks, has been prompted by 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, Subbarao said while unveiling the annual credit policy in Mumbai.

"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 RBI Governor D. Subbarao said.

RBI has pegged the GDP growth rate for 2012-13 at 7.3 per cent. It is expected to be 6.9 per cent in 2011-12.

After two consecutive cuts since January, the Governor, however, retained the cash reserve ratio at 4.75 per cent.

Subbarao, however, 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 decision 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 clamour by industry to cut rates and spur industrial and economic growth that has slowed down considerably during the past few quarters.

With PTI inputs