Third Quarter Review of Monetary Policy for 2008-09

Monetary Measures

• CRR - unchanged at 5.00%
• Reverse Repo rate - unchanged at 4.0%
• Repo Rate - unchanged at 5.5%
• Bank Rate - unchanged at 6.0%

Other Highlights
• GDP growth projection for FY09 revised to 7.0 % with a downward bias.
• M3 growth raised to 19.0% during FY09 from 16.5-17% in 2008.
• Aggregate Deposits projected to rise by around 19.0 per cent during 2008-09.

Stance of the Monetary Policy

3rd Quarter Monetary Review (Current)

1)To Provision comfortable liquidity to meet the required credit growth consistent with the overall projection of economic growth.

2)To respond swiftly and effectively with all possible measures as warranted by the evolving global and domestic situation impinging on growth and financial stability

3)To ensure a monetary and interest rate environment consistent with price stability, well-anchored inflation expectations and orderly conditions in financial markets.

The 3rd quarter monetary policy was seen as a status quo with RBI leaving all its major policy rates unchanged. Albeit! The rising RBI wariness regarding moderation in GDP growth and the declining credit flow in the commercial sector gives rise to studied speculation that RBI may further reduce the bank’s liquidity-premium. This can come by way of further reduction in reverse-repo rate or by placing ceiling/limitation on the investible sum through reverse-repo window.

The policy statement also reveals that RBI is of the opinion that the continued liquidity easing since Sept 08 has created ample room for the banks to respond proactively to market cues (and follow-through the rate decline to commercial borrowers).

However, the central banker also realizes that the drying-up of the external avenues of borrowing has had a limiting effect on the Indian commercial sector. In FY09, the aggregate financial resource inflow in the Indian commercial sector declined by nearly 3% over previous year. This is despite the higher credit offtake by the commercial sector in the present year. Consequently, a perception regarding the lack of credit availability has developed, which amongst other things, is contributing towards a high credit interest rate regime notwithstanding the liquidity relaxation in the money market


Outlook:-In this backdrop, we believe that the RBI policy has largely been neutral with a slightly dovish undertone. The RBI imperativeness on enhancing and augmenting the liquidity requirement to smoothen the credit off take gives reason to believe that central banker may resort to further rate cuts. The declining WPI based inflation provides additional headroom for RBI to act in this regard. Nonetheless, it is possible that some debt market participants may have build up their positions largely in view of a more accommodative policy - And therefore may unwind the resultant portfolio positions built on such view. In consequence, the 10-year Gsec is expected to remain in the 5.50-6% range in the near term.
Additionally, supply concerns because of increased borrowing from the centre could also exert pressure in the immediate. However, given the broad economic fundamentals & a declining inflation trend, we believe that interest rates would continue to display downward bias going forward.
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