RBI maintains status quo on interest rates

The Reserve Bank of India maintained status quo on interest rates in its third quarter review of the Monetary Policy for 2008-09. The central bank left its repo rate, reverse repo rate and the cash reserve ratio (CRR) unchanged on Tuesday.

In his first policy presentation, Governor Dr. D. Subbarao kept the Bank Rate unchanged at 6.0 per cent. The repo rate has been kept unchanged at 5.5 per cent, and so has the reverse repo rate been kept steady at 4.0 per cent under the LAF.

The cash reserve ratio (CRR) of scheduled banks has also been kept unchanged at 5.0 per cent of NDTL. The RBI has extended up to Sep 30, 2009 the refinance facilities announced on Nov 1, allowing banks to avail liquidity support under the LAF for meeting the funding requirements of mutual funds, NBFCs and housing finance companies through relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL.

The special refinance facility for scheduled commercial banks (excluding RRBs) up to 1.0 per cent of each bank’s NDTL as on Oct 24, 2008, has also been extended to Sep 30, 2009. Both these facilities are currently available up to June 30, 2009.

Policy Stance

Keeping in view the global scenario and domestic economy, mainly the outlook on growth and inflation, the RBI’s monetary policy stance for the rest of 2008-09 is as follows:

• Provision of comfortable liquidity to meet the required credit growth consistent with the overall projection of economic growth.

• Respond swiftly and effectively with all possible measures as warranted by the evolving global and domestic situation impinging on growth and financial stability.

• Ensure a monetary and interest rate environment consistent with price stability, well-anchored inflation expectations and orderly conditions in financial markets.

The RBI will continue to maintain vigil, monitor domestic and global developments, and take swift and effective action to minimise the impact of the crisis and restore the economy to its potential growth path with price stability.

The response to the RBI’s policy actions over the last several months is still unfolding.

Growth Projection

The Indian central bank has revised downward the projection of overall real GDP growth for 2008-09 to 7.0 per cent with a downward bias. This is keeping in view the slowdown in industry and services and with the assumption of normal agricultural production.

The Mid-Term Review of October 2008 had estimated real GDP growth for 2008-09 in the range of 7.5–8.0 per cent. Services sector activities are likely to further decelerate in the second half of 2008-09, the RBI noted.

Inflation Projection The apex bank has projected WPI inflation to decelerate to below 3.0 per cent by end-March, in view the global trend in commodity prices and the domestic demand-supply balance.

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, foodgrains and cement has influenced inflation expectations in most parts of the world, the RBI noted.

It had earlier projected wholesale price index inflation rate at 7.0 per cent for end-March 2009.

The monetary policy would continue to condition and contain perception of inflation in the range of 4.0-4.5 per cent so that an inflation rate of around 3.0 per cent becomes the medium-term objective, consistent with India’s broader integration into the global economy and with the goal of maintaining self-accelerating growth over the medium-term, the RBI said. However, it said the headline WPI inflation could fall well below 3.0 per cent in the short-run partly because of the statistical reason of high base, and the global trends caused by exceptionally high oil and commodity prices in early 2008.

Monetary Projection The RBI has raised the projection of money supply (M3) growth for 2008-09 to 19.0 per cent from 16.5-17.0 per cent earlier. The aggregate deposit growth for 2008-09 is revised to 19.0 per cent from 17.0 per cent earlier. The projection of growth of adjusted non-food credit, including investment in bonds/debentures/shares of public sector undertakings and private corporate sector and CP, for 2008-09 is revised to 24.0 per cent from 20.0 per cent earlier.