At 3.03% in the year to 21 February 2009
Triggered by falling commodity prices, inflation based on the wholesale-price-index dropped to 3.03% in the week ended 21 February 2009, an around six-and-half year low, government data released today, 5 March 2009 showed. Inflation rose 3.36% in the previous week. Inflation stood at 3.01% in the week ended 19 October 2002.
Meanwhile annual inflation for the week ended 27 December 2008 was revised to 5.86% from 5.91%.
The Reserve Bank of India (RBI) late Wednesday, 4 March 2009, cut the repo rate and reverse repo rate by 50 basis points each, with immediate effect. It is expected that the reduction in the policy interest rates will further encourage banks to provide credit for productive purposes at viable interest rates, RBI said in a release. RBI said it will continue to maintain ample liquidity in the system.
RBI said there is uncertainty with regard to recovery of the global economy. With regarding to the Indian financial sector, the RBI says that India's financial sector continues to be resilient in the face of global financial turmoil. The financial markets in India continue to function in an orderly manner, it says.
However, India's growth trajectory has been negatively impacted by the global financial crisis and the global economic downturn, according to the central bank. The negative impact of the global crisis on the Indian economy has been deeper and wider than anticipated earlier, according to the central bank.
RBI said there is evidence of further slowing down of economic activity. The services sector, which has been the main engine of growth during the last several years has also been slowing down. Business confidence has been dented significantly and investments demand has decelerated.
Reflecting these developments, the aim of various measures initiated by the Reserve Bank since mid-September 2008 has been to augment domestic and forex liquidity and to ensure that credit continues to flow to productive sectors of the economy.
RBI estimates that the cumulative amount of actual or potential primary liquidity made available to the financial system through various measures initiated by the central bank is over Rs 3,88,000 crore. Besides, the reduction in SLR by one percentage point of NDTL has made available liquid funds of the order of Rs.40,000 crore for the purpose of credit expansion. This sizeable easing has ensured a comfortable liquidity position.
Meanwhile, in terms of the amendment to the Memorandum of Understanding on Market Stabilisation Scheme (MSS) on 26 February, 2009, an amount of Rs 45,000 crore will be transferred in installments from the MSS cash account to the normal cash account of the Government of India by 31 March, 2009. An equivalent amount of government securities issued under the MSS would now form part of the normal market borrowing of the Government of India. According to RBI, this arrangement should provide comfort to the market. Furthermore, the Reserve Bank has also conducted purchase of government securities under its open market operations (OMOs). RBI said it will continue to such OMOs depending on the evolving monetary and financial market conditions.
Even as some public sector and private sector banks have cut lending rates in response to the Reserve Bank India's loose monetary policy stance, credit growth has moderated as commercial banks are worried about the rising credit risk amid the slowing of economic activity. RBI says it continues to urge banks to monitor their loan portfolio and take early action to prevent asset impairment down the road and safeguard the gains of the last several years in improving asset quality. At the same time, banks should price risk appropriately and ensure that creditworthy enterprises continue to get funding, it said.
According to RBI data, the total flow of resources to the commercial sector from banks and non-banks during 2008-09 so far (up to February 13, 2009) at Rs.4,98,136 crore was lower than Rs.6,08,351 crore during the corresponding period of the last year.
Taking the signal from the reductions in the repo and reverse repo rates in recent months, all public sector banks and several private sector and foreign banks have reduced their benchmark prime lending rates (BPLRs). Since the announcement of the third quarter review of the monetary policy by RBI, eleven banks have cut their BPLRs ranging from 25 basis points to 125 basis points. Several banks have also cut their deposit interest rates.
RBI said it has been constantly monitoring global developments along with the domestic economic situation. On the positive side, inflationary pressures have eased significantly. Though consumer price inflation has remained at elevated level due to increase in primary articles prices, it is expected to decline with a lag effect after a sharp fall in the wholesale price inflation.
