RBI maintains status quo

The Reserve Bank of India (RBI) maintained a status quo on key policy rates after aggressively easing its monetary stance since October, as the central bank ascertains the impact of its previous measures on the Indian economy. The repo rate is unchanged at 5.5% while the reverse repo rate is static at 4% and the cash reserve ratio (CRR) has also been left steady at 5%.

The Bank Rate has been kept unchanged at 6%. The RBI also slashed its estimate on FY09 GDP growth to 7% from 7.5-8% earlier with a negative bias. The outlook on real GDP growth has been affected further and the downside risks to growth have amplified because of slowdown of industrial activity and weakening of external demand as reflected in decline in exports, the RBI said. Services sector activities are likely to further decelerate in the second half of 2008-09, it added.

"There is now distinct evidence of further slowdown as a consequence of the global downturn. The knock-on effects of the global financial crisis, economic slowdown, and falling commodity prices are affecting the Indian economy in several ways," the RBI said.

The only positive that one can draw comfort from is that the headline inflation has decelerated, though consumer price inflation is yet to show moderation, the central bank said. Inflation, based on the WPI, will fall sharply by the end of March to 3% from its earlier forecast of 7%. "Inflation on account of primary articles still remains at the double digit level, reflecting sustained price pressures, particularly on food articles," the RBI said. WPI inflation, excluding food and fuel, too remains higher this year as compared with the previous year, it added.

Since mid-September 2008, the RBI has taken a number of monetary easing and liquidity enhancing measures. At the same time, the Government has also launched two fiscal stimulus packages to boost aggregate demand. But, their effectiveness will be known only a few months down the line. There is a period of painful adjustment ahead of us, the RBI said. However, once the global economy begins to recover, India’s turnaround will be sharper and swifter, it added. The challenge for the Government and the central bank is to manage the adjustment with as little pain as possible, the RBI said.

For monetary policy to have demand inducing effects, lending rates will have to come down, the RBI said, hinting that banks will have to slash rates further. The current deposit and lending rates have significant room for further reduction, the central bank said. Interest rates in the money and bond markets have already declined perceptibly since their peaks in October. Banks’ cost of funds would come down, and this should encourage banks to reduce their lending rates in the coming months, the RBI said.

Taking into account the diminished upside risk to inflation, the projection of money supply (M3) growth for 2008-09 is raised to 19% from 16.5-17% earlier. The aggregate deposit growth for 2008-09 is revised to 19% from 17% earlier. The projection of growth of adjusted non-food credit for 2008-09 is revised to 24% from 20% earlier.