The Reserve Bank of India (RBI) on Tuesday cut its policy interest rate by a quarter percentage point, lowering it to a more than five-year low. Most analysts expect the RBI to cut the repo rate to 6.50 per cent - the lowest since January 2011.
RBI Governor Raghuram Rajan said that given weak private investment in the face of low capacity utilization, a reduction in the policy rate by 0.25 per cent will help strengthen growth.
Rajan took quite a few measures on the liquidity front, beginning with the narrowing of the policy rate corridor to 0.50 per cent from the earlier 1 percentage point, which resulted in the reverse repo rate - at which banks can park excess funds with the RBI - being reset at 6 per cent.
The average overnight borrowings by banks have increased to Rs 1,935 billion in March from Rs 1,345 billion in January, the policy said.
The RBI retained its GDP growth forecast at 7.6 percent, on the assumption of a normal monsoon and a boost to consumption through the implementation of the seventh pay panel recommendations.
The RBI expects the implementation to hurt inflation by 1-1.5 percent over a two year period, but added that the shock will not be as strong as that felt during the implementation of the sixth pay panel suggestions.
The governor welcomed the government move to amend the RBI Act to create a monetary policy committee, saying it will further strengthen the policy's credibility.
The central bank increased the reverse repo rate by 25 basis points to 6 percent on account of new rate corridor and kept the cash reserve ratio unchanged at 4 percent.
In spite of the RBI easing the rate last year aggressively than at any time since the 2008-2009 global financial crisis, annual economic growth slowed to 7.3 percent in the October-December quarter from 7.7 percent in the previous quarter.