Monetary policy: RBI leaves key rates, CRR unchanged
New Delhi, Jan 27: In line with the expectations, the Reserve Bank of India (RBI) on Tuesday, while announcing a review of its monetary policy, left key interest rates and the Cash Reserve Ratio (CRR) unchanged.
Analysts had predicted that the RBI would not go in for cuts in repo and reverse repo rates (short-term lending and borrowing rates) in its quarterly policy review, taking into account the latest developments in international and domestic markets.
Earlier on January 4, the RBI had reduced the repo rate by 100 basis points to 5.5 percent, the reverse repo rate by 100 basis points to 4 percent, and the CRR (the amount banks are required to park with the RBI) from 5.50 percent to 5 percent. With no change this quarter, these rates will stand true for now.
Further, the RBI in its monetary policy review stated that inflation was expected to moderate further to below 3 percent by March-end.
It also reduced the current fiscal GDP growth projection to 7 percent from 7.5 to 8 percent, saying the global economic crisis has hit Indian shores.
The January 4 rate cuts were aimed at injecting more funds into the system and signalling a softer interest rate regime to boost economic growth.
The RBI has been reducing key policy rates since October to neutralise the impact of the global financial meltdown on the Indian economy. While the repo rate and the CRR were at nine percent in October, the reverse repo rate was at 6 percent.
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 percent.
Likewise, special refinance facility for scheduled commercial banks up to one percent 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.
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 percent with a downward bias for 2008-09.
In the last monetary policy in October, the apex bank had projected 7.5-8 percent 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 percent by this fiscal-end.
It is recognised that headline WPI inflation could fall well below 3 percent in the short-run, it said, adding that the monetary policy continue to condition and contain inflation rate at 4-4.5 percent so that an inflation rate of around 3 percent becomes medium-term objective.