The Reserve Bank of India (RBI) today cuts the cash reserve ratio (CRR) by 50 bps to 5.50 per cent which will be effective from January 28 and held repo rate steady at 8.5 per cent. The cut in CRR was done to ease the tight liquidity situation.  The move will eases tight liquidity in the banking system and underscore a policy shift from fighting inflation to reviving growth. The CRR cut will infuse Rs 32,000 crore into banks.

The RBI said it expected a modest recovery in growth in the fiscal year that starts in April, and said that while inflation may ease, price pressures persist.

The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands at 9.5 per cent. The Bank Rate has been retained at 6 per cent.

The reverse repo rate also remained unchanged at 7.50 per cent. The RBI also kept inflation forecast unchanged at 7 per cent. The RBI also cut GDP forecast for Financial Year 2012 from 7.6 per cent to 7 per cent. The RBI Governor D Subbarao said liquidity conditions remain tight and the policy action to ease liquidity.

Meanwhile, RBI has cut FY12 gross domestic product forecast to 7% from 7.6%. It has kept inflation forecast unchanged at 7%.

The policy document said that these steps will ease liquidity conditions, mitigate downside risks to growth and continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation.

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