India’s central bank yesterday cut the cash reserve ratio as it tries to kick-start flagging growth and welcomed government efforts to open Asia’s third-largest economy to more foreign investment.
The Reserve Bank of India (RBI) said the share of deposits that banks must keep with it as reserves was cut by a quarter percentage point to 4.5 percent, injecting about 170 billion rupees (US$3.14 billion) into the banking system.
The central bank also announced that it would keep its short-term lending rate, or repo rate, unchanged at 8 percent.
The monetary policy decisions come just days after the government announced landmark reforms aimed at boosting India’s economy.
The bank said the primary focus of its monetary policy remains the fight against inflation, which has persisted above 7.5 percent.
Last week the government announced a sharp increase in the price of highly subsidized diesel, hoping to rein in its rising fiscal deficit.
In a surprise move on Friday, the government said it would allow foreign direct investment (FDI) in retail, aviation and broadcasting. The government also announced it would sell its stakes in four state-run companies.
The central bank said the government’s recent actions had paved the way for more favorable economic conditions by initiating a shift in expenditure away from consumption by reducing fuel subsidies and toward investment, including through foreign direct investment.
“Steps taken to increase FDI should contribute to both greater capital inflows and, over the long run, higher productivity, particularly in the food supply chain. Importantly, however, for the moment, inflationary pressures, both at wholesale and retail levels, are still strong,” the RBI said in its monetary policy review.
The government’s announcement allowing foreign companies in retail and raising the price of diesel has met with protests from opposition parties and some of the ruling Congress Party’s coalition partners. However, it was welcomed by industry saying it would jumpstart the country’s slowing economy.