As part of decisions, forming the second stimulus package finalised jointly with the government, RBI announced cut in Cash Reserve Ratio (percentage of deposits that banks have to keep with RBI) and other key rates.
The apex bank has cut CRR by 50 basis points to five per cent, short-term lending (repo) rate by 100 basis points to 5.5 per cent with immediate effect and short-term borrowing (reverse repo) rate by similar percentage points at 4 percent.
The cut in CRR would lead to infusion of Rs 20,000 crore into the system over and above Rs 3,00,000 crore (Rs 3000 billion) injected since October 2008.
The central bank had last cut the key benchmark rates by 100 basis points on December 6. Today's announcement comes 25 days ahead of the third quarterly review of credit policy scheduled for January 27.
All the steps taken by RBI would lead to further reduction in the interest rates by the banks. SBI chairman O P Bhatt said, "...we will definitely review our rates, both on the lending side as well as the deposit side in our Assets and Liability Committee, and as we have done in the past..."
Interest rate would definitely go down, Punjab National Bank Chairman and Managing Director K C Chakrabarty told PTI. The bank would review the situation as rates were cut yesterday only, he said.
The reduction in policy interest rates and the CRR is widely expected to bring down interest rates, particularly home, auto, consumer and corporate loans, analysts felt.
The top five public sector banks have reduced their PLRs from a range of 13.75-14 per cent as on October 1, 2008 to a range of 12-12.50 per cent at present, RBI said.
On Thursday, several public sector banks including the largest lender SBI had reduced their prime lending rates.
SBI slashed PLR by 75 basis points to 12.25 per cent, applicable to all existing and new floating rate loans, including housing ones. Besides, it also effected a 0.25-1 per cent reduction in its deposit rates across various maturities.
Explaining the rationale for rate cut, RBI said on review of the current domestic and macro economic situations, it was decided to take these monetary stimulus, which would enable banks to provide credit for productive purposes at appropriate interest rates.
"Besides, RBI on its part will continue to maintain a comfortable liquidity position in the system," it added.
The central bank, however, noted that there was evidence of slowing down of economic activity, adding that the business confidence had been dented significantly and there were clear signs of declaration in demand.
Asserting that global financial situation continued to be uncertain, RBI said Indian financial sector remained resilient in the face of global turmoil that was so deep and pervasive.
The fundamentals of the Indian economy continued to be strong, RBI said, adding, "Once the crisis is behind us and calm and confidence is restored in the global market, economic activity in India would recover sharply. But a period of painful adjustment is inevitable."
Acknowledging that inflationary pressure had come down significantly, RBI said inflation had come down from the high of 12.91 per cent in August last year to 6.38 per cent as on December 20.
