Mumbai: The Reserve Bank of India (RBI) in its Tuesday quarterly review of monetary policy kept its key rates – the repo, reverse repo and cash reserve ratio of banks – unchanged at 4.75%, 3.25% and 5%, respectively.
While the uncertainty surrounding the ongoing recovery of the global economy was one reason for not announcing any major move, the central bank has revised its outlook of some other parameters.
RBI revised its inflation target for end-March 2010 to about 5%, higher than the 4% projection it made during its annual policy in April. The reason for the revision, according to RBI, demand balances. It noted that the current growth rate and inflation for 2009-10 have an upside risk, or they can go up from the projected level. It kept its gross domestic product (GDP) growth unchanged at 6%, but with an “upward” bias.
“At the global level, the financial sector seems to be stabilizing, but the real sector continues to be in recession,” the bank said in its first quarterly policy statement. It added that while there have been some positive signals observed in recent months related to consumer spending and credit spreads, they are “too tentative and weak to suggest any firm turnaround.”
Given this background, “a firm recovery at the global level is unlikely before 2010,” the bank said.
On the domestic front, while there have been some progressive signs of recovery in key areas such as food stocks, industrial production, corporate performance; stock prices, and higher credit off-take, the central bank cautioned that “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.”
Economists see this policy as a neutral one, which, going forward, will focus on liquidity tightening measures. Banks are parking in excess of Rs1.3 trillion with RBI everyday and going forward, this liquidity in the system might stoke inflation. RBI Governor, D. Subbarao, in multiple occasions has acknowledged that withdrawing the liquidity will become a priority going forward and will be the focus of the central bank.
According to Bank of Baroda chief economist Rupa Rege Nitsure, the central bank is unlikely to go for its liquidity withdrawal exercise in a hurry and will probably postpone its monetary tightening stance starting the fourth quarter or the first quarter of the next fiscal.
“Despite all the monetary and fiscal measures, growth is in its nascent stage and it is right on the central bank’s part not to go for liquidity withdrawal now and adopt a neutral stance,” said Nitsure.
“From the second half, liquidity management will really become a challenge and RBI tightening might start from the end of the fiscal year or the first quarter of the next fiscal,” she said.
Sherman Chan, economist, Moody’s Economy.com also aired the same view.
“The Reserve Bank of India’s decision to sit tight at the July meeting marks the end of the monetary loosening regime,” said Chan in a post-policy research report.
RBI noted that its immediate challenge is to manage the balance between the short-term compulsions of providing ample liquidity and the potential build-up of inflationary pressure. However, it did mention that the wholesale price based index (WPI), a key indicator of inflationary trends and which is currently at a negative 1.17%, is “only a statistical feature and do not have any structural significance.”
It said that there is scope for banks to bring down their lending rates further. Between October 2008 and 20 July, public sector banks have reduced the deposit rates by 125-325 basis points, private banks have pared 100-375 basis points and foreign banks have cut down their deposit rates by 125-300 basis points. The reduction in lending rates between the three category of banks were 125-275 basis points by public sector banks, followed by 100-125 basis points by private banks and 125 basis points by five major foreign banks, RBI said.
At the time of filing this story, bankers were not available for comments.
On its part, RBI has reduced the repo rate by 425 basis points, reverse repo by 275 basis points and cash reserve ratio by 400 basis points.
For the banking sector, RBI revised upwards its deposit growth projection to 19% from 18% and forecast a higher money supply growth at 18% from the 17% projected during the annual policy. It left its non-food credit growth rate forecast unchanged at 20%.