India loosens monetary policy - FT.com India's central bank surprised the markets on Friday when it loosened its tight monetary policy to ease a credit squeeze in the banking system and moderate a sharp economic slowdown. The Reserve Bank of India announced a 75 basis point cut in the cash reserve ratio (CRR), the proportion of deposits banks must keep with the central bank, to 4.75 per cent. The move injected about Rs480bn ($9.6bn) into the country's banking system. India's aggressive move, the first policy action outside a scheduled meeting since July 2010, comes after China, Brazil and Indonesia intervened to ease liquidity, as emerging economies try to shield themselves from the European debt crisis. The rate cut also highlights the RBI's growing concern about the liquidity crunch's impact on the wider economy. "The overall deficit in the system persists above the comfort level of the Reserve Bank," the central bank said in a statement. Accordingly, it has been decided to inject permanent primary liquidity into the system by reducing the CRR so as to ensure smooth flow of credit to productive sectors of the economy. Growth in the last quarter of 2011 was the slowest in nearly three years , rising 6.1 per cent in the quarter ending December 31, compared to above 8 per cent a year earlier. "The latest GDP figures have already raised a question mark over growth projections for the fiscal 2011-12," said R V Kanoria, president of the Federation of Indian Chambers of Commerce and Industry. "Any further delay in bringing down the key monetary policy rates by RBI could prove to be critical for the country's growth trajectory," he added. Indian companies have been begging the central bank to cut rates, as the RBI's aggressive monetary tightening policy in the past two years to curb inflation has choked investment and hurt growth. Economists said that although a CRR rate slash was expected, most were surprised by the magnitude of the cut. "We had predicted a 50 basis point cut," said Anubhuti Sahay, an economist at Standard Chartered in Mumbai. But it's a positive sign that they cut more as it shows that the bank is flexible enough to take more aggressive actions when needed. The RBI's decision to act ahead of its scheduled mid-quarter policy review on March 15 suggests that it is unlikely next week to cut the key lending rate, which is at 8.5 per cent, several economists said. "Today's CRR cut does not automatically imply a policy rate cut," said Sonal Varma, chief economist at Nomura in Mumbai. This is because oil prices are already high and the budget is one day after the RBI's policy on 16 March.