Mumbai: Reserve Bank of India (RBI) governor D. Subbarao paused for breath in his effort to loosen credit while pledging swift and effective action to maintain price and financial sector stability in his maiden monetary policy review on Friday.
That Subbarao would hold his hand had been expected after he cut the policy rate by 100 basis points and banks’ cash reserve ratio (CRR), or the proportion of deposits that commercial banks need to keep with the central bank, by 250 basis points, releasing Rs1 trillion into the system, over the past fortnight. A basis point is one-hundredth of a percentage point.
The governor pared the economic growth projection for fiscal 2009 from 8% to 7.5% but kept the year-end inflation projection unchanged at 7%. High bank credit growth, according to him, still remains a concern for the central bank.
Economists and analysts said worries about a credit bubble and a falling rupee, which pierced the psychologically important level of 50 to a dollar on Friday, has stopped the central bank from further loosening monetary policy, which may stimulate the economy but increase the risk of capital flight.
Some of them are finding the growth projection too optimistic while a few others feel RBI will have to cut policy rates sooner than later to keep the growth momentum. “This is an optimistic projection, showing the central bank’s confidence,” said Sherman Chan, an economist with Moody’s Economy.com, a subsidiary of Moody’s Corp. She expects the Indian economy to record a less upbeat growth rate — but still-stunning amid the sharp global downturn — of around 7% for the current fiscal year.
“With the growth environment coming under stress, we expect a further easing of the repo rate going forward,” said the Asia Policy Watch of Goldman Sachs Group Inc., released after RBI announced its mid-term policy review.
Subbarao admitted that the pace of economic expansion will moderate but the country will return to the high growth path soon if inflation is kept low and financial stability is preserved. The policy statement said the task before RBI is to strike a balance between financial stability, price stability and maintain growth momentum. “To manage this challenge, RBI has deployed and will continue to deploy both conventional and unconventional tools,” it said.
The bond market, which had been expecting a cut in key policy rates like statutory liquidity ratio, or SLR, showed its disappointment with the benchmark 10-year bond yield rising to 7.8% from its Thursday’s close of 7.56%.
“I think we have addressed the liquidity problem but we need to ensure that the liquidity is passed on to the financial system. Liquidity may prove to be a pressure point once again, But RBI still has a room to infuse liquidity further,” said Subir Gokarn, chief economist (Asia Pacific) for ratings agency Standard and Poor’s.
Shubhada Rao, chief economist at Yes Bank Ltd, said recent weeks have seen significant easing in the monetary stance and probably RBI will wait for the effect of these measures to kick in before taking any further action.
Bank chiefs admitted that liquidity has eased but none of them at this point is committing to any cut in interest rates. R.S. Reddy, chairman and managing director, Andhra Bank, said, “The cost of funds is still very high. We have to wait and watch before taking any action on rates. I am not looking at a rate cut as of now.”
“We have to quickly evaluate our asset liability mismatch and decide on the future course of action,” said M.D. Mallya, chairman and managing director, Bank of Baroda. “Our asset liability committee will evaluate any rate related decision and we will not initiate any hasty move.”
Subbarao has not directed any bank to cut rates but insisted they maintain credit flow and quality. “The central bank will monitor the rate of credit growth and credit quality closely and will as necessary, engage with select banks which are outliers on the norms,” he said, signalling the central bank’s intention to intervene with a strong hand.
“Banks are advised to follow stricter credit appraisals on a sectoral basis, monitor loan to value ratios and calibrate their credit portfolio in tune with their asset-liability projections,’’ he cautioned.
“These are extraordinary times,” said K.C. Chakrabarty, chairman and managing director, Punjab National Bank. “We should not interpret too much into RBI’s decision. As and when the situation demands, it can swing into action. Our own course of action remains the same. We should be very cautious and not try to become adventurous.”