Indian Monetary Policy Eased on Year's First Trading Day

January 3, 2009

2008 saw deep interest rate cuts in a broad cross-section of advanced and developing economies. The Reserve Bank of India became the first major central bank to loosen credit policy in 2009, cutting its repo rate by 100 basis points to 5.5% and reserve requirement to 5.0% from 5.5%. Four rate cuts since mid-September now total 350 basis points, and the reserve ratio has dropped 400 basis points in all. A released statement speaks of a lower growth outlook and observes that exports fell in October-November and industrial production continues to slow very sharply. Activity has also decelerated in the service sectors. Consumer price inflation has not fallen much, but a significant drop in wholesale price inflation and the worsening growth prognosis point to a sharper CPI improvement this year. The central bank’s steps were coordinated with an announced government fiscal plan to help recapitalize banks and promote foreign capital inflows.


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