New Delhi, Jan. 29: The cut in the repo rate and the cash reserve ratio will encourage investments, anchor inflationary expectations and stimulate economic growth, Prime Minister's Economic Advisory Council chairman C. Rangarajan said.
"The RBI has taken a very balanced view. This will ensure that stimulus is provided to growth while continuing efforts to contain inflation. The RBI will cut rates further if inflation continues to ease," he said. The council has pegged inflation in 2013-14 at 6 per cent.
Pitching for greater capital inflows, Rangarajan said they helped in dealing with the problem of high current account deficit (CAD).
According to Planning Commission deputy chairman Montek Singh Ahluwalia, the CRR cut will give banks more resources to lend. "I think this is the right thing to do given that we feel that the economy is beginning to bottom out," he said.
"The important thing is what happens to the long- term interest rates. I believe that the CRR cut will have a significant effect on that because it will release resources (for banks)," he added.
The repo rate cut will reduce the borrowing cost for individuals and corporate houses. The CRR cut will increase the availability of funds.
Ficci president Naina Lal Kidwai said, "This will hopefully help to reverse the anaemic industrial growth observed over the last year."
Factory output in November contracted 0.1 per cent after registering a robust growth of 8.3 per cent in October. Output during the current fiscal has grown in just three of the last eight months.
The economy, which had been growing at a near double-digit pace before the crisis at Lehman Brothers, has suffered a rapid deceleration.
The RBI has cut its growth forecast for this fiscal to 5.5 per cent from 5.8 per cent. This will be the slowest since 2002-03.
It expects headline inflation to be around 6.8 per cent by March. Inflation eased to a three-year low of 7.18 per cent in December but is still above the RBI's comfort level of around 5 per cent.
"A weak consumption and investment demand has been derailing the growth momentum of the economy and today's announcement will help to improve consumer and investor sentiments," CII director-general Chandrajit Banerjee said.
Arun Singh, an economist with Dun and Bradstreet, said, "While a cut in repo was widely anticipated, only a commensurate lowering of lending rates by the banks might lead to a pick-up in credit demand going ahead."