The Reserve Bank of India in its quarterly review meet on Tuesday cut the cash reserve ratio (CRR) by 50 bps to ease tight liquidity pressure in the banking system. RBI kept repo and reverse repo rates unchanged at 8.5% and 7.5% respectively, despite mounting anxiety over slowdown in growth.

The cash reserve ratio, the proportion of deposits that banks have to hold with the RBI, is a popular instrument to inject cash into the system. It now stands at 5.5%.

Banks are borrowing more than Rs 1.2 lakh crore from the RBI, which is double of what the central bank has said it is comfortable with.

According to experts, commencement of interest rate cuts may take longer despite slowing growth, as the two-year-low inflation number may be short-lived due to fiscal profligacy, widening of welfare schemes, and a weak currency.

The bank hiked rates 13 times since March 2010, the most aggressive pace of monetary tightening among its global peers, to deal with the persistently high inflation, including rising prices of food items. The RBI left interest rates unchanged in December.

The Reserve Bank of India (RBI) on Monday said the growth outlook and business climate have weakened but warned of upward risks to inflation in its Macroeconomic and Monetary Developments Third Quarter Review 2011-12.

For the quarter ended September last year, the economy grew at 6.9 per cent, its weakest pace in more than two years.
The RBI in its Macroeconomic review said it expects growth to improve in the fiscal year that starts in April, but that weak investment climate and contraction in demand may keep the recovery slow.

Inflation which has been the biggest concern of the central bank has dropped from near-double digits to 7.47 per cent in the month of December last year as food price pressure eased dramatically, but manufactured products' inflation edged up from November.

Food inflation entered the negative zone in mid-December and stood at (-) 0.42 per cent as of January 7, as per the latest numbers released by the government.

The rupee fell 16 per cent against the dollar in 2011. A weak rupee inflates the cost of oil imports and could pose an upside risk to the country's budgeted fiscal deficit target of 4.6 per cent of gross domestic product