Thursday, January 29, 2009

Mid-Term Review of Monetary Policy

The Reserve Bank of India (RBI) Governor, Dr. Duvvuri Subbarao has announced the Mid-Term Review of the Monetary and Credit Policy for 2008-09 in Mumbai on January 27, 2009. The RBI has left all key rates unchanged. It announced that the Bank Rate, Repo, Reverse Repo and the Cash Reserve Ratio (CRR) would be maintained at current levels. By leaving the key rates unchanged, the apex bank has given the message that it would rather wait to see the impact of its earlier monetary measures than initiate further action. The lending rate remains at 5.5 per cent, the Reserve Repo (the rate at which the RBI absorbs cash from banks) at four per cent and the CRR (the amount the banks keep with it) at five per cent. Earlier in January 2009, the RBI had cut the short-term rates by one percentage point and the CRR by 50 basis points.
Growth Rate
Acknowledging the slowdown in the economy, the apex bank stated that the country’s Gross Domestic Product (GDP) target for the current financial year 2008-09 has been revised downwards to seven per cent with a downward bias as against the previous target of between 7.5 per cent to eight per cent. This is based on the assumption that the agricultural performance would remain normal.
It expected fiscal deficit at 5.9 per cent of GDP as against 2.5 per cent expected earlier. It further warned that the expected revenue surplus of States may not materialise. Inflation target for the fiscal year was, however, marked down to three per cent, versus an earlier target of below seven per cent. It stated that it expected the Consumer Price Index (CPI) to fall further with decline in input prices.
In fact, the global economic crisis will dent India’s growth trajectory as exports and investments have dropped. The Government and the apex bank will have to manage the adjustment with as little pain as possible.
Banking Sector
The demand for credit from the banking sector has increased as other sources of funds to the commercial sector have shrunk. Given the uncertain outlook of resources availability from both external and non-bank domestic sources, the RBI has raised its indicative projection of the total flow of credit from the banking sector to the commercial sector to 24 per cent for 2008-09 from 20 per cent envisaged in the annual policy statement. The apex bank stated that in India, the policy response to global financial crisis and recession had been predominantly driven by the need to arrest moderation in economic growth. The RBI has also extended refinance facility to commercial banks, mutual funds, NBFCs and housing finance companies to September 30, 2009.
Nevertheless, the global financial crisis has led to a reversal of capital flows causing, among others, sharp dips in stock markets and depreciation of the rupee. Global credit lines to Indian companies have all but dried up and there has been a pronounced deceleration in world trade.
The apex bank is quite slow in cutting rates unlike the Central Banks of other countries grappling with the ripple effects of recession. It is clear that the recent interest rate cuts have not stimulated demand and more needs to be done to keep growth from slipping.

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