Reserve Bank’s moves helped to keep economy on growth track

The rupee was not spared either. By March 2009, the local currency had reached 52 to a dollar, a record low, as foreign investors continued to pull out. RBI had to sell dollars to prop up the rupee. India’s foreign reserves, $316 billion in May, subsequently came down to $250 billion by year-end.

As the situation worsened throughout October, banks soon had to start borrowing money from RBI though its so-called liquidity absorption facility window. On October 10, banks had to borrow a whopping Rs92,000 crore from RBI when the interest rate in the overnight interbank market jumped to 20%. On an average, banks borrowed Rs43,000-46,000 crore daily during September and October. An additional Rs40,000 crore was released by bringing down banks’ bond holding obligation to 24% of their deposit liabilities, from 25% earlier.

Since September, RBI reduced banks’ cash reserve requirement by 400 basis points, and brought down the repo and reverse repo rates, or the rates by which it injects and sucks out liquidity from the system, to 4.75% and 3.25% from 9% and 6%. These steps led to the release of some Rs4.22 trillion in the economy, RBI estimates. It also helped push the economy back on the growth track. Compared with recession-stricken developed nations, India merely saw growth moderate in 2008-09, the survey noted. “On a preliminary assessment, the economy evinces early signs of turnaround,” it summed up.

ravi.k@livemint.com