Home, auto and corporate loans will become cheaper after Reserve Bank today reduced the key interest rate by 0.25 per cent and decided to inject Rs 18,000 crore liquidity into the system to perk up sagging growth.
Shedding its nine-month long hawkish monetary policy stance, the RBI cut short-term lending rate called repo by 0.25 per cent to 7.75 per cent and Cash Reserve Ratio (CRR) by similar margin to 4 per cent. The other key rates have been adjusted accordingly.
These initiatives are aimed at encouraging investments, supporting growth and anchoring inflationary expectations, RBI Governor D Subbarao said while unveiling the third quarter monetary policy review here.
Bankers indicated that they would cut lending and deposit rates over next couple of days to the benefit of borrowers, though depositors may get lesser returns. The industry too appeared satisfied with the rate cut hoping that it would boost demand and promote growth.
On future policy actions, RBI said, it would depend upon fiscal situation and growth-inflation dynamics, which to a large extent will be conditioned by the budget to be presented by Finance Minister P Chidambaram on February 28.
"If inflation moderates further, CAD (Current Account Deficit) moderates further, there will be more room for monetary policy easing. But if they go along the currently expected lines, the space for monetary policy easing is quite limited", Subbarao said.
RBI has lowered the growth projection for the current fiscal to 5.5 per cent from 5.8 per cent estimated earlier.
The economy grew by 6.5 per cent in 2011-12.
"We will pass on (the benefit of rate cut) to our borrowers without compromising on the Net Interest Margin", said SBI Chairman Pratip Chaudhuri.
The RBI also cut the March end inflation projection to 6.8 per cent, from 7.5 per cent earlier.
While stock markets initially cheered RBI's rate cut with the BSE Sensex moving up by 91 points, however, the Sensex declined to 19,991, down by 115 points over yesterday's close.
Asked about a possible cut in deposit and borrowing rate, ICICI Bank CEO and Managing Director Chanda Kochhar said "there is going to be a transmission on the lending side, while on the deposits front, we will wait and watch. There isgoing to be a lag ... The cuts are positive for EMIs".
Commenting on the policy action, Commerce and Industry Minister Anand Sharma said: "It is a positive step which will infuse