The RBI in its mid-term policy review kept the key policy variables unchanged. In view of comfortable liquidity condition and expected lagged effects of the recent policy actions, the RBI decided to maintain a status quo on the rate front.
In a span of just four months, the RBI has aggressively eased its monetary stance by reducing the CRR, Repo and Reveres Repo rate by 400 bps, 350 bps and 200 bps respectively.
The cumulative reduction in CRR and unwinding of MSS has injected liquidity to the extent of Rs2,230 billion, thereby easing the liquidity pressures significantly.
The easing of call rates and increase in amount of funds parked by banks in the LAF window are indicative of comfortable liquidity in the system.
The weighted average call rate has eased to 4.42% (as on 16-Jan-09) from a peak of 19.7% (as on 10-Oct-08).
Also, the LAF window has seen net absorption of liquidity to the tune of Rs2,759.6 billion on 02 January’09 as against net injection of Rs2,725.2 billion on 1 October’08.
In consonance with the RBI rate cuts, few banks have reduced their lending rates. However, the extent of cuts in lending rates has been very low given that deposit rates are already at high levels.
Alignment of deposit and lending rates with the policy rates is likely to come with a lag and hence would have induced RBI to adopt a wait and watch approach.
Nonetheless, given the economic slowdown, we expect cut in policy rates before the next monetary policy review to boost credit-funded demand.
Growth in bank credit has moderated to 23.71% during December’08 as compared to 28.9% during October’08.
The increase in the amount of funds parked with the RBI via the reverse repo window (at a time when reverse repo rate is at an all-time low) in part reflects the increase in risk aversion by the banks.
The difficulty in raising funds from other avenues further amplifies the current situation by putting downward pressure on investment demand, which is already showing signs of moderation.
With deteriorating demand conditions (domestic as well as international) and investment losing momentum, the downside risks to India’s growth prospects have increased significantly.
Further, contribution from the services sector (prime engine of growth in recent years) is also expected to decelerate in H2 FY09.
The slowdown in industry and services coupled with the assumption of normal agricultural production has necessitated the RBI to scale down its real GDP growth forecast for FY09 to 7.0 % (with a downward bias) from earlier 7.5-8 %.