Interviews
RBI Governor announces First Quarter Review of Monetary Policy 2009-10
30 Jul '09
5 min read
Quick and aggressive policy responses both by the Government and the Reserve Bank mitigated the impact of the global financial crisis. The large domestic demand bolstered by the government consumption, provision of forex and rupee liquidity coupled with sharp cuts in policy rates, a sound banking sector and well-functioning financial markets helped cushion the economy from the worst impact of the crisis.
There are now progressive signs of recovery in India: food stocks have increased; industrial production has turned positive; corporate performance has improved; business confidence surveys are optimistic; leading indicators show an upturn; interest rates have declined; credit off-take has picked up after May 2009; stock prices have rebounded; the primary capital market has witnessed some activity; and external financing conditions have improved. On the other hand, there are some negative signs: delayed and deficient monsoon; food price inflation; rebound in global commodity prices; continuing weak external demand; and high fiscal deficit.
Monetary Policy Action
We have adjusted the policy rates several times in the last ten months. Currently, the repo rate is at 4.75%, the reverse repo at 3.25%, and the CRR at 5%. Consistent with our current assessment of macroeconomic and monetary conditions, we have decided to keep all these rates unchanged.
Reserve Bank's Policy Thrust
The thrust of the various policy initiatives by the Reserve Bank since mid-September 2008 has been on providing ample rupee liquidity, ensuring comfortable dollar liquidity and maintaining a market environment conducive for the continued flow of credit to all productive sectors. These actions have resulted in augmentation of actual/potential liquidity of over Rs.5,61,700 crore.
The liquidity situation has remained comfortable since mid-November 2008 as evidenced by the LAF window where the Reserve Bank has been absorbing nearly Rs.1,20,000 crore on a daily average basis during the current financial year. The liquidity expansion has been consistent with the Reserve Bank's stance of ensuring a policy regime that will enable credit expansion at viable rates while preserving credit quality.
Interest Rate Response from Banks
As liquidity remains ample, the competitive pressure on banks to reduce lending rates has increased. Consequently, the transmission of policy rate changes to bank lending rates has improved since the last Annual Policy Statement in April 2009. As the short-term deposits contracted earlier at high rates mature and get repriced, it opens up room for banks to further reduce their lending rates.
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There are now progressive signs of recovery in India: food stocks have increased; industrial production has turned positive; corporate performance has improved; business confidence surveys are optimistic; leading indicators show an upturn; interest rates have declined; credit off-take has picked up after May 2009; stock prices have rebounded; the primary capital market has witnessed some activity; and external financing conditions have improved. On the other hand, there are some negative signs: delayed and deficient monsoon; food price inflation; rebound in global commodity prices; continuing weak external demand; and high fiscal deficit.
Monetary Policy Action
We have adjusted the policy rates several times in the last ten months. Currently, the repo rate is at 4.75%, the reverse repo at 3.25%, and the CRR at 5%. Consistent with our current assessment of macroeconomic and monetary conditions, we have decided to keep all these rates unchanged.
Reserve Bank's Policy Thrust
The thrust of the various policy initiatives by the Reserve Bank since mid-September 2008 has been on providing ample rupee liquidity, ensuring comfortable dollar liquidity and maintaining a market environment conducive for the continued flow of credit to all productive sectors. These actions have resulted in augmentation of actual/potential liquidity of over Rs.5,61,700 crore.
The liquidity situation has remained comfortable since mid-November 2008 as evidenced by the LAF window where the Reserve Bank has been absorbing nearly Rs.1,20,000 crore on a daily average basis during the current financial year. The liquidity expansion has been consistent with the Reserve Bank's stance of ensuring a policy regime that will enable credit expansion at viable rates while preserving credit quality.
Interest Rate Response from Banks
As liquidity remains ample, the competitive pressure on banks to reduce lending rates has increased. Consequently, the transmission of policy rate changes to bank lending rates has improved since the last Annual Policy Statement in April 2009. As the short-term deposits contracted earlier at high rates mature and get repriced, it opens up room for banks to further reduce their lending rates.
Click here to view more:
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