India's Central Bank Keeps Key Rates Unchanged

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The Reserve Bank of India or RBI Governor, D. Subbarao, while reviewing the monetary poly for the third-quarter of fiscal 2009 on Tuesday, kept all the key rates unchanged, in view of deteriorating global economic outlook and uncertainty about the global financial sector ever since its Mid-term Review in October 2008.

The central bank in its monetary review lowered the GDP growth estimate for the fiscal year and expects the inflation rate to moderate by end March 2009 in the medium-term objective.

Monetary Measures

The RBI has kept all the key rates unchanged. Accordingly, the bank rate stands unchanged at 6%, while repo rate and reverse repo rate under LAF are maintained at 5.5% and 4% respectively. The cash reserve ratio or CRR was also kept unchanged at 5%.

However, the apex bank retains the option to conduct overnight or longer-term repo/reverse repo under the LAF, depending on market conditions and other relevant factors.

Liquidity Facilities

The Reserve Bank has allowed banks to avail liquidity support under the LAF for the purpose of meeting funding requirements of mutual funds, non-banking financial companies and housing finance companies and provided a special refinance facility for scheduled commercial banks (excluding RRBs). These facilities are currently available up to June 30, 2009.

In order to ensure that banks continue to have flexibility in their liquidity management operations in the current market conditions, the apex bank has decided to extend both the refinance facilities up to September 30, 2009.

Growth Projection

The RBI in its October 2008 Mid-Term Review estimated GDP growth for the fiscal 2009 in the range of 7.5%-8%. Since then the outlook on real GDP growth has deteriorated further and the downside risks to growth rate have amplified on account of the slowdown of industrial activity and weakening of external demand as reflected in the decline in exports. Keeping in view the slowdown in industry and services and anticipating normal agricultural production, the projection of overall real GDP growth for 2008-09 is revised downwards to 7% with a downward bias.

Inflation

The Governor is also optimistic that the inflation will moderate by the end of this fiscal year, considering the sharp decline in crude oil prices coupled with the slide in prices of metals, food grains and cement in most part of the world. Considering the global trend in commodity prices and the domestic demand-supply balance, WPI inflation is now projected to decelerate to below 3% by the end of March 2009 in the medium-term objective. However, the monetary policy will continue to condition and contain perception of inflation in the rate of 4.0%-4.5%.

Money Supply

The RBI said the monetary and credit aggregates continue to expand at a higher rate than projected in the Annual Policy Statement of April 2008. The liquidity overhang built-up in recent years due to an unprecedented surge in capital inflows, however, is gradually diminishing. As the upside risks to inflation have declined, monetary policy has been responding to slackening economic growth in the context of significant global stress.

Accordingly, the RBI has raised the projection of money supply or M3 growth for fiscal 2009 to 19% from 16.5%-17% projected earlier. Consistent with this, the aggregate deposit growth for 2008-09 is revised to 19% from 17% earlier.

Summing up, the RBI said given the uncertain outlook on the global crisis, it is difficult to precisely anticipate every development. The central bank will continue to maintain vigil, monitor domestic and global developments, and take swift and effective action to minimize the impact of the crisis and restore the economy to its potential growth path with price stability. The Reserve Bank added that it would act swiftly and decisively as and when evolving external and domestic conditions so warrant.

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