India Cuts Rates, Rupee Weakens

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Mar. 19 – The central bank of India cut its main interest rate by 25 basis points today after its mid-quarter policy review. This is the second rate reduction this year as India attempts to jumpstart its slowing economy.

The Reserve Bank of India (RBI) also said that its benchmark repo rate, the rate used to give loans to commercial banks, would fall to 7.5 percent. Meanwhile, India’s cash reserve ratio (the percentage of deposits banks must keep with the central bank) remains unchanged. The RBI also stated that its most recent quarterly growth figures revealed India’s weakest growth rates in at least 15 quarters.

This latest cut comes after India’s Finance Minister, P. Chidambaram, issued the relevant measures in last month’s budget. Chidambaram also pledged to cut India’s fiscal deficit so as to avoid damaging credit ratings and to create more sustainable growth.

The Indian government estimated that its economy had grown by 4.5 percent from October-December, a number that has fallen sharply from rates of nearly 10 percent for the same period earlier in 2010.

Indian stocks and the rupee also fell due to the rate cut, while bond yields rose slightly. The Indian rupee fell to 54.30 per dollar, losing about 0.6 percent after the RBI cut the repo rate. The rupee had earlier risen to 53.97 per dollar.

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