The Reserve Bank on Tuesday lowered the economic growth forecast to 7 per cent, saying the global economic crisis has hit Indian shores, but kept key policy rates and ratio unchanged.
The bank also lowered inflation estimates to 3 per cent by March end.
In its quarterly review of the annual monetary policy, the apex bank extended special refinance facilities to banks up to September 30 for providing liquidity support to meet the funding requirements of mutual funds, non-banking finance companies and housing finance companies by relaxing the maintenance of SLR up to 1.5 per cent.
Likewise, special refinance facility for scheduled commercial banks up to one per cent to each banks liabilities, has been extended to September 30. Both these facilities were earlier available up to June 30, 2009.
These measures have been taken to provide banks continued flexibility in their liquidity management operations in the current market conditions.
Given the uncertain outlook on the global crisis, the RBI said it was difficult to precisely anticipate every development.
"The Reserve Bank will continue to maintain vigil, monitor domestic and global developments and take swift and effective action to minimise the impact of the crisis," the apex bank said in a statement.
The central bank will also attempt to restore the economy to its potential growth path with price stability, it said.
The response to the Reserve Bank's policy actions over the last several months is still unfolding. As demonstrated in the recent past, the Reserve Bank will act swiftly and decisively as and when evolving external and domestic conditions so warrant, the RBI said.
The bank has injected over Rs 3,00,000 crore liquidity into the financial system through several changes in policy rates since October 2008.
Justifying its policy stance of not changing key rates, RBI said that the monetary policy easing done by it in the last few months allowed considerable room for banks to respond more actively to the policy cues.
In the last three months, the repo rate, at which the apex bank lends short term funds to banks, has been reduced from 9 per cent to 5.5 per cent and the reverse repo, at which the RBI accepts funds from banks, has been lowered from 6 per cent to 4 per cent.
Asserting that RBI has acted aggressively and pre- emptively in the last few months to bring about interest rate cuts, it said the signal has been effective in the money and government security market.
However, the transmission in the credit market has so far been subdued, it said, adding that most banks have reduced lending and deposit rates to some extent, but a few are yet to do so.
Warning that the global crisis will dent India's growth, as investments and exports were slowing, RBI said: "Clearly there is a period of painful adjustment ahead of us. However, once the global economy begins to recover, India's turnaround will be sharper and swifter."
The turnaround will be backed by strong fundamentals and untapped growth potentials and the challenge for Government and RBI is to manage the adjustment with as little pain as possible, the central bank said.
Keeping in view the slowdown in industry and services and with the assumption of normal agriculture production, RBI lowered GDP growth projection to 7 per cent with a downward bias for 2008-09.
In the last monetary policy in October, the apex bank had projected 7.5-8 per cent growth. Since then, the outlook has been affected further and downside risks to growth have amplified due to economic slowdown.
On inflation, Reserve Bank said pressures on commodity prices have abated markedly around the world, reflecting slump in global demand. The sharp decline in crude oil prices together with the slide in prices of metals, food grains and cement has influenced inflation expectations.
With commodity prices falling sharply and taking in to consideration, the domestic demand-supply balance, the inflation is now projected to fall below 3 per cent by this fiscal-end.
It is recognised that headline WPI inflation could fall well below 3 per cent in the short-run, it said, adding that the monetary policy continue to condition and contain inflation rate at 4-4.5 per cent so that an inflation rate of around 3 per cent becomes medium-term objective.