Mumbai:  Shifting policy stance from inflation to growth, Reserve Bank on Tuesday announced measures to release Rs 32,000 crore into the system signalling banks to cut interest rates.

READ MORE:Inflation remains a concern: RBI
RBI decision to promote growth: Pranab

RBI cut cash reserve ratio -- a portion of deposits that banks are required to keep with the central bank -- from six percent to 5.5 percent, but kept short-term lending (repo) rates unchanged at 8.5 percent. New CRR rate is applicable from January 28.

Unveiling review of the monetary policy, it said that while growth faces downside risks, inflation still is a concern.

"We do expect that lending rates will come down...there are no big concerns on monetary policy transmission," RBI Governor D Subbarao told reporters.

Indicating the direction of interest rates, State Bank of India Chairman Pratip Chaudhuri said, "Perhaps there could be some softening of lending rates in some select pockets".

Expressing similar views, ICICI Bank Managing Director Chanda Kochhar said, "...the trend is towards that, you would see a softening (of interest rates)".

However, Subbarao said for rates to fall, government will have to check fiscal deficit.

The RBI did not go in for reduction in the short-term rates because, it felt that "based on the current inflation trajectory, including... suppressed inflation, it is premature to begin reducing the policy rate". It pegged inflation at 7 percent by March-end.

It also lowered growth projection for 2011-12 to 7 percent from 7.6 percent in view of global slowdown and domestic policy constraints.

The stock market reacted positively to the policy announcement and the banking stocks, in particular, shot up.

Reacting to the RBI initiative, Finance Minister Pranab Mukherjee said, "it will have more money to lend and liquidity will increase.