Showing concerns over hardening inflation, the Reserve Bank on Tuesday left the key interest rate unchanged but reduced cash reserve ratio by 0.25% to infuse additional liquidity that will inject Rs17,500 crore into the financial system.
Accordingly, the CRR or the portion of deposits banks have to park with the RBI now stands at 4.25% while the repo rate, at which RBI lends to the system, has been retained at 8%.
The reverse repo, at which RBI absorbs excess liquidity through borrowings from banks, remains at 7%.
Reacting to the policy, the BSE 30-stock index, Sensex, slid 181.72, or 0.98%, to 18,454.10 at 1138 hours.
The new rates will be effective November 3, RBI Governor D Subbarao said while unveiling the mid-year monetary policy review.
"Managing inflation and inflationary expectations remains the primary focus of the monetary policy," Subbarao said, stating that the persistently high inflation remains a "key challenge" even though growth has slid.
The CRR cut, the Governor said, is aimed at enhancing liquidity. It will infuse Rs17,500 crore into the system, complement the Government's reform measures and anchor medium term inflation expectations.
The easing of CRR would release primary liquidity prompting banks to cut interest rates.
The RBI has also revised downwards the GDP growth estimate to 5.8% from the earlier 6.5%, while increased its March-end headline inflation forecast to 7.5%. It is the second time since the beginning of the fiscal that it has revised its estimate on both the aspects.
There was widespread expectation that the Governor may play the ball with the government today especially after North Block announced a fiscal consolidation roadmap against the backdrop of the backdrop of the gush of reform measures announced in the past 45 days.