Strong concern on liquidity and inflation
RBI has released second quarter review on
Monetary Policy for the year 2009-10. The apex bank of India has kept
all key rates of interest unchanged .The repo rate under the Liquidity
Adjustment Facility (LAF) has been retained unchanged at 4.75%. The
reverse repo rate under the LAF has been retained unchanged at 3.25%.
The Bank Rate has been retained unchanged at 6.0%. On other hand, the
cash reserve ratio (CRR) of scheduled banks has been retained unchanged
at 5.0 % of their net demand and time liabilities (NDTL).
However RBI has hiked SLR to 25% from 24%. In view of difficult
macroeconomic situation and liquidity conditions in the global and
domestic financial markets after the collapse of Lehman Brothers, the
statutory liquidity ratio (SLR) of scheduled commercial banks (SCBs)
was reduced from 25% to 24% of their NDTL with effect from 8 November
2008. The liquidity situation has remained comfortable since
mid-November 2008 as reflected in the surplus funds being placed by
banks daily in the LAF window of the Reserve Bank. Accordingly, it has
been decided to restore the SLR for scheduled commercial banks to 25%
of their NDTL with effect from the fortnight beginning 7 November 2009.
SCBs are currently maintaining SLR investments at 27.6% of their NDTL,
net of LAF collateral securities, and 30.4 % of NDTL, inclusive of LAF
collateral securities. As such, the increase in the SLR will not impact
the liquidity position of the banking system and credit to the private
sector.
The policy is within the market expectations. The WPI inflation
specially food prices are growing. The current inflation rate has
largely been derived by supply side and RBI has accepted its little
role in this regard. Meanwhile, RBI has raised inflation projection to
6.5% with upward bias for March 2010 from 5% earlier. On other hand,
RBI has cut the growth projection in money supply which always fuels
inflation. The indicative projection of money supply growth of 18.0%
set out in July 2009 is revised downwards to 17.0%.
The central bank cut its FY10 credit growth target to 18% from 20% that
it had set in the July monetary policy review. The RBI has preferred to
focus on growth and kept growth projection remained at 6% with upward
bias for March 2010. On the whole, agricultural production in 2009-10
is expected to be lower than in last year.
The global economic outlook presents a mixed picture. On the positive
side, world output, as per the International Monetary Fund (IMF)
estimates, has expanded by 3 per cent in the second quarter
(quarter-on-quarter, annualized), manufacturing activity has picked up,
trade is recovering, financial market conditions are improving, and
risk appetite is returning On the negative side, there are concerns
that the recovery is fragile. The second quarter improvement is
essentially the outcome of policy-induced stimulus. Going forward, the
impact of the stimulus will fade away and inventory rebuilding may lose
momentum.
Policy Stance
On the basis of the above overall assessment, the stance of monetary
policy for the remaining period of 2009-10 will be as follows:
-Keep a vigil on the trends in inflation and be prepared to respond
swiftly and effectively through policy adjustments to stabilize
inflation expectations.
-Monitor the liquidity situation closely and manage it actively to
ensure that credit demands of productive sectors are adequately met
while also securing price stability and financial stability.
-Maintain a monetary and interest rate regime consistent with price
stability and financial stability, and supportive of the growth
process.
-In conclusion, it bears emphasis that the Reserve Bank is mindful of
its fundamental commitment to price stability. It will continue to
monitor the price situation in its entirety and will take measures as
warranted by the evolving macroeconomic conditions swiftly and
effectively.
