The Reserve Bank of India on Tuesday left key policy rates unchanged even as it placed GDP growth for the current fiscal at 6 per cent with an upward bias.
The central bank also notched up the inflation projection for the current fiscal to 5 per cent from 4 per cent projected in the Annual Policy Statement in April 2009.
After adjusting policy rates downwards several times in the last 10 months, the RBI appears to have hit the pause button. Analysts feel that this may be an indication that interest rates have bottomed out.
Since mid-September 2008, the RBI reduced policy rates significantly: The repo rate by 4.25 percentage points to 4.75 per cent and the reverse repo rate by 2.75 percentage points to 3.25 per cent. The Cash Reserve Ratio was also reduced by 4 percentage points to 5 per cent of the net demand and time liabilities of banks.
GDP projection
According to the RBI, the updated GDP growth projection for FY-2010 marks a slight improvement over the expectations indicated in April.
“The revision in the GDP outlook comes in the wake of the business outlook turning positive on the back of a revival in industrial activity, more favourable domestic and external financing conditions, and fiscal and monetary stimulus measures boosting demand. There are signs of revival, but they are not broadbased. They are too tentative as of now to be taken as robust signals,” the RBI Governor, Dr D. Subbarao, said at a press meeting to announce the First Quarter Review of Monetary Policy for FY-2010.
Explaining why inflation would edge up, the Governor said the base effect, which is generating the negative wholesale price index (WPI) inflation, is projected to wear off by October 2009. Thereafter, the year-on-year WPI inflation, in view of the global trend in commodity prices and the domestic demand-supply balance, would creep up even without any major supply shock.
Stable rates
According to Mr M. V. Nair, Chairman, Indian Banks’ Association, the RBI’s status quo on key policy rates was an indication that interest rates will remain stable over a period. Asked if there was further scope for banks to lower interest rates, Mr Nair said banks had passed on the cut in policy rates by the RBI to customers. Corporates were getting loans at lower rates. The cut in lending rates has put downward pressure on banks’ net interest margins.
On the money supply (M{-3}) front, the RBI revised upwards the M{-3} growth for FY-2010 to 18 per cent, up from 17 per cent projected in the April policy.
In sync with the higher M{-3}, the aggregate deposits of banks are projected to grow at 19 per cent (18 per cent earlier) even as the growth in adjusted non-food credit has been retained at 20 per cent.
Challenge ahead
“The challenge going forward is to increase the demand for credit and supply of credit. If you talk to bankers’, they say demand for credit has gone down. And if you talk to corporates they say there is no credit coming. Evidently, there is a mismatch. Going forward the challenge is to see that there is a convergence between the demand and supply,” the Governor said.
Reiterating that the RBI will maintain an accommodative monetary stance until there are definite and robust signs of recovery, the Governor said, “On the way forward, the RBI will have to reverse the expansionary measures to anchor inflationary expectations and subdue inflationary pressures while preserving growth momentum.”
source: BL
The central bank also notched up the inflation projection for the current fiscal to 5 per cent from 4 per cent projected in the Annual Policy Statement in April 2009.
After adjusting policy rates downwards several times in the last 10 months, the RBI appears to have hit the pause button. Analysts feel that this may be an indication that interest rates have bottomed out.
Since mid-September 2008, the RBI reduced policy rates significantly: The repo rate by 4.25 percentage points to 4.75 per cent and the reverse repo rate by 2.75 percentage points to 3.25 per cent. The Cash Reserve Ratio was also reduced by 4 percentage points to 5 per cent of the net demand and time liabilities of banks.
GDP projection
According to the RBI, the updated GDP growth projection for FY-2010 marks a slight improvement over the expectations indicated in April.
“The revision in the GDP outlook comes in the wake of the business outlook turning positive on the back of a revival in industrial activity, more favourable domestic and external financing conditions, and fiscal and monetary stimulus measures boosting demand. There are signs of revival, but they are not broadbased. They are too tentative as of now to be taken as robust signals,” the RBI Governor, Dr D. Subbarao, said at a press meeting to announce the First Quarter Review of Monetary Policy for FY-2010.
Explaining why inflation would edge up, the Governor said the base effect, which is generating the negative wholesale price index (WPI) inflation, is projected to wear off by October 2009. Thereafter, the year-on-year WPI inflation, in view of the global trend in commodity prices and the domestic demand-supply balance, would creep up even without any major supply shock.
Stable rates
According to Mr M. V. Nair, Chairman, Indian Banks’ Association, the RBI’s status quo on key policy rates was an indication that interest rates will remain stable over a period. Asked if there was further scope for banks to lower interest rates, Mr Nair said banks had passed on the cut in policy rates by the RBI to customers. Corporates were getting loans at lower rates. The cut in lending rates has put downward pressure on banks’ net interest margins.
On the money supply (M{-3}) front, the RBI revised upwards the M{-3} growth for FY-2010 to 18 per cent, up from 17 per cent projected in the April policy.
In sync with the higher M{-3}, the aggregate deposits of banks are projected to grow at 19 per cent (18 per cent earlier) even as the growth in adjusted non-food credit has been retained at 20 per cent.
Challenge ahead
“The challenge going forward is to increase the demand for credit and supply of credit. If you talk to bankers’, they say demand for credit has gone down. And if you talk to corporates they say there is no credit coming. Evidently, there is a mismatch. Going forward the challenge is to see that there is a convergence between the demand and supply,” the Governor said.
Reiterating that the RBI will maintain an accommodative monetary stance until there are definite and robust signs of recovery, the Governor said, “On the way forward, the RBI will have to reverse the expansionary measures to anchor inflationary expectations and subdue inflationary pressures while preserving growth momentum.”
source: BL
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