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Reserve Bank of India reduces key interest rate

The country’s central bank lowers full-year growth forecast.

The Reserve Bank of India (RBI) has reduced its key interest rate to 7.75 per cent from 8 per cent for the first time in nine months to spur economic growth.

India’s central bank also reduced the amount of money that banks need to keep in reserve. The move is expected to provide 180bn Indian rupees of extra cash for them to lend.

Although, India’s economy grew by 5.3 per cent in the July to September quarter from a year earlier, but consumer price growth has slowed in the recent times. In December 2012, the country’s wholesale price index declined to an 11-month low of 7.18 per cent.

Anticipating further slowdown in inflation in the near future, the RBI, in a statement, said that the slowdown in the rate of inflation “provides space, albeit limited, for monetary policy to give greater emphasis to growth risks”.

As well as fall in domestic demand, Indian exports and manufacturing sector were affected due to the slowdown in the global economy. Moreover, delay in economic reforms made foreign investors cautious of entering the country.

For the fiscal year 2012-13, RBI has lowered its full-year growth forecast to 5.5 per cent from its earlier forecast of 5.8 per cent.

Sujan Hajra, chief economist at Anand Rathi Securities in Mumbai, told the BBC: “The Reserve Bank of India is definitely less hawkish in its statement, and we think it will remain in the easing mode in 2013.”