Mumbai, December 6
Aiming to kick-start the economy which is reeling under a global recession, the Reserve Bank of India today slashed key rates by 1 per cent and unveiled other measures that would allow easier funds for industry.

Announcing the measures, RBI Governor D. Subbarao said the repo rate, at which the apex bank lends overnight funds to banks, was being reduced from 7.5 per cent to 6.5 per cent while the reverse repo rate, at which it accepts deposits from banks, was slashed to 5 per cent from 6 per cent. This is the first time since 2003 that reverse repo rate was being cut, the RBI said. The new rates would come into effect from December 8.

The rate cuts, Subbarao said, should result in interest rate reduction across the board. “It is our expectation that the banks will take a signal from the rate cuts,” he said.

The RBI Governor said the reduction in rates was prompted by fall in inflation. “Inflation is expected to come down further due to the fall in petrol and diesel prices announced yesterday,” Subbarao said. Sounding a note of warning, Subbarao said economic activity in the country was slowing down. “There is evidence that…..real GDP growth has moderated in the first half of 2008-09,” he said.

“The services sector too, which has been our prime growth engine for the last five years, is slowing, mainly in construction, transport and communication, trade, hotels and restaurants sub-sectors. For the first time in seven years, exports have declined in absolute terms in October. Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity. Higher input costs and dampened demand have dented corporate margins while the uncertainty surrounding the crisis has affected business confidence,” the RBI Governor said.

“Industrial activity, particularly in the manufacturing and infrastructure sector is decelerating... recent data indicate that the demand for bank credit is slackening despite comfortable liquidity. Higher input costs and sluggish demand have denied corporate margins, while the uncertainty surrounding the crisis has affected business confidence,” Subbarao added.

Other measures being unveiled by the apex bank includes infusing an additional Rs 11,000 crore in the country’s realty and small scale sectors thus taking the total funds infused into the system to Rs 3,00,000 crores since October this year.

The RBI Governor said the apex bank was instituting a refinancing facility of Rs.7,000 crore for SIDBI. This is aimed to improve credit flow to micro and small enterprises which are facing a fund shortage. A similar package Rs 4,000 crore was announced for National Housing Bank.

In order to improve housing loans for the needy, the apex bank said it would classify housing loans below Rs 20 lakh from housing finance companies to individuals under the priority sector. But banks can lend only five per cent of their total priority sector lending under this category.