RBI cuts rate to help recovery

Mumbai, Aug 24: The Reserve Bank of India cut the key short-term interest rate benchmark by half a point on Saturday, a move expected to aid recovery in Asia's third-largest economy, analysts said.
A central bank spokeswoman said the cut to 4.5 per cent, to take effect on August 25, had been decided in the light of low inflation and a good monsoon.

The announcement came shortly after news that India's foreign exchange reserves have risen above the $85 billion-mark for the first time. Analysts said it will reduce the gap over US rates and moderate arbitrage-seeking foreign exchange inflows.

The repo rate is what the RBI pays to borrow short-term funds against securities. It was last cut on March 3.

"Conditions are in now place for an industrial investment boom to take place by the financial year-end," said Sanjeev Sanyal, Singapore-based economist at Deutsche Bank.

Inflation, as measured by wholesale prices, fell to 3.96 per cent in the year to August 2 from 5.32 per cent in late June, helped by a fall in prices of agricultural goods and analysts expect good rains to keep prices of farm goods from rising.

The southwest monsoon is the lifeline of the Indian economy as over two-thirds of the nation's billion-plus population lives off the land and only one-third of the arable land is irrigated. The farm sector accounts for a quarter of India's GDP.

Last year the country was hit by the worst drought in 15 years with rains dipping to 70 per cent of the average in June and July, causing farm sector output to shrink and GDP growth to slump to 4.3 per cent from 5.6 per cent in the previous year.

Bureau Report