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RBI moves: Target shifts from inflation to growth
BS Reporter in New Delhi | October 22, 2008 11:58 IST
By cutting the rate at which it lends to commercial banks, the Reserve Bank of India [Get Quote] has decisively signalled that it has moved from targeting inflation to promoting growth rate, and further cuts in interest rates are expected, economists said on Tuesday.
RBI cut the repo rate - the rate at which the central bank lends to banks in exchange for government securities for a period ranging from one to three days - by one percentage point after a gap of four years.
"It's a clear signal from RBI that it has moved from inflation to growth priority," said Subir Gokarn, an economist with Standard & Poor's.
Though the latest Wholesale Price Inflation rate is 11.44 per cent, above the RBI's comfortable rate of 5 per cent, Prime Minister Dr Manmohan Singh told Parliament on Tuesday, "The movement in the level of prices show a clear deceleration in the current momentum of inflation. We expect a further reduction in the wholesale price index in the next two months".
Gokarn said RBI would now be expected to reduce the repo rate till the central bank gets a response in terms of growth numbers.
Describing the magnitude and timing of the repo rate cut as ahead of market expectations, Tushar Poddar, vice president, Asia Economics Research, Goldman Sachs, said, "We were expecting 150 basis points easing by the first quarter of 2009.
According to Goldman Sachs, transactions in the repo window are now around $7.8 billion as against a peak of over $16 billion.
Rajeev Malik of Macquarie Economics Research said, "We also maintain a belief that the central bank will have to cut SLR by 2-3 percentage points, though this action will probably be unveiled in April 2009 when the policy for the next financial year will be announced."
SLR or statutory liquidity ratio is the amount banks invest in government securities, expressed as a percentage of the bank's demand liabilities.
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