In a weekend surprise move, it cut the repo rate (the rate at which it lends to banks, and which, in turn, is a signal to banks for paring their lending rates) by 50 basis points to 7.5 per cent. This is the second reduction in the last two weeks. The RBI had pared the repo rate by 100 basis points to 8 per cent on October 20. The latest cut is clearly aimed at encouraging investments by making funds more affordable to borrowers and removing apprehensions regarding the change in its policy stance.

With liquidity conditions remaining tight during the week and call money rates soaring to 21 per cent on Friday, the central bank further slashed the cash reserve ratio (the portion of deposits banks need to keep with the RBI without earning any interest) by 100 basis points to 5.5 per cent. This will infuse Rs 40,000 crore into the system in two equal tranches, starting on October 25 and November 8. The reduction in CRR comes on top of the 250 basis points cut in the second half of October that had injected Rs 100,000 crore into the system.

In a statement on its website, the RBI said that Saturday’s measures were “in view of the ebbing of upside inflation risks as also to address concerns relating to the moderation in the growth momentum”. RBI Governor D Subbarao recently acknowledged that the indirect impact of the global crisis on countries such as India is by no means trivial or insignificant. Clearly, today’s measures reflect those concerns and the government’s resolve to keep the growth juggernaut running.

The RBI has also reduced the statutory liquidity ratio—the portion of bank funds to be invested in government securities—by 100 basis points to 24 per cent of deposits with effect from the fortnight beginning November 8. The SLR was cut temporarily by one per cent earlier to 24 per cent and this cut has been made permanently effective.

In another significant move to improve liquidity, the RBI has decided to buy back the government securities sold under the Market Stabilisation Scheme (MSS) earlier to sterilise the expansionary effects of forex inflows. “In the context of forex outflows in the recent period, it has been decided to conduct buy-back of MSS dated securities so as to provide another avenue for injecting liquidity of a more durable nature into the system. This will be calibrated with the market borrowing programme of the government,” it said.

After providing liquidity support to mutual funds, the central bank has also decided to extend the liquidity support to non-banking finance companies to enable them to manage their funding requirements. In order to facilitate this, it has now allowed banks to avail funds up to 1.5 per cent of their deposits by relaxing the SLR norms. The RBI has also introduced a special refinance facility for banks to draw funds from the central bank up to one per cent of their deposits as on October 24 for 90 days at 7.5 per cent.

Announcing the measures, the RBI said, “global financial conditions continue to remain uncertain and unsettled, and early signs of a global recession are becoming evident. These developments are being reflected in sharp declines in stock markets across the world and heightened volatility in currency movements.” International money markets are yet to regain calm and confidence and return to normal functioning. The Sensex had dropped 24 per cent in October.

What has helped the RBI come out with a rate cut is the decline in inflation since August 9, 2008 to 10.68 per cent for the week ended October 18. “Globally, pressures from commodity prices, including crude, appear to be abating. The moderation in key global commodity prices, if sustained, would further reduce inflationary pressures,” it said.

The RBI further said that it would continue to sell foreign exchange (US dollar) through banks to augment supply in the domestic foreign exchange market and intervene directly to meet demand-supply gap. The forex reserves had fallen by over $ 15 bn last week, largely due to the RBI intervention in the forex market to stabilise the rupee. On the growth front, the RBI said, “It is important to ensure that credit requirements for productive purposes are adequately met so as to support the growth momentum of the economy. Domestic financial markets have been functioning normally.”

Bankers on Saturday said that the steps would induce banks to cut lending rates like commercial, home, auto loans as well as deposit rates. (See business page). Reeling under pressure of costly borrowing, corporates will surely heave a sigh of relief as the steps by the RBI will ease liquidity in the system thereby lowering the interest rates. ICICI Bank’s joint managing director Chanda Kochhar said that the steps taken by the banking regulator will bring down interest rates. “It shows the mindset of the regulator that is continuously monitoring the situation and coming up with measures on dynamic basis,” she said.