Mumbai: The Reserve Bank of India (RBI) on Thursday revised its growth forecast for 2008-09 to 7.7% from 7.9% in its mid-term report on macroeconomic and monetary developments, even as it called for revisiting the roles of banks, regulators, supervisors and fiscal authorities in the current environment.
For the first time, the central bank also conceded that the credit crisis seems to be spreading across markets, institutions and countries.
The central bank’s growth forecast is in line with that of the Prime Minister’s economic panel, and reflects a cyclical downturn; the report, however, said that the structural drivers of the growth process continue to be favourable.
“There has been a structural shift in the RBI’s monetary stance; it is now focusing more on maintaining the growth momentum in the country,” said Rupa Rege, chief economist, Bank of Baroda. “The central bank seems to have taken a view that inflation is expected to ease as the global fuel and commodity prices are showing some signs of easing.”
According to the first quarter estimates of fiscal 2008-09 released by the Central Statistical Organisation (CSO) in August 2008, real GDP growth was placed at 7.9%, compared with 9.2% during the corresponding period last year.
The bank also emphasized that the overall stance of monetary policy in 2008-09 would continue to accord high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to growth.
The report said there were signs of moderation in inflationary pressures—the wholesale price-based inflation eased to 11.07% for the week ended 11 October, from a high of 12.63% in the week ended 9 August—and an increase in risks to growth presented by the ongoing crisis in the global financial system.
The bank also said it would aim at bringing down inflation levels to close to 7% by March 2009.
The report reaffirmed that “central banks should play a central role in maintaining financial stability and should have the necessary informational base to do so effectively. This implies close cooperation among all the agencies entrusted with the task of maintaining financial stability.”
Since the global crisis has hit Indian financial market, both regulatory bodies—RBI and the Securities and Exchange Board of India, the markets regulators—have been working in tandem to ensure financial stability, using a mix of soft and hard decisions to ensure liquidity and credit.
“It needs to be recognized that there has been a breakdown of trust in inter-bank and inter-institutional lending. The reversal of such extreme kind of risk perception and full resolution of the crisis will inevitably take time,” the bank said in its report.
“More than growth or inflation, liquidity is the principal focus of the central bank at the moment,” said Indranil Pan, chief economist, Kotak Mahindra Bank.
However, he added that RBI has already used most of the weapons in its arsenal to improve liquidity and that it is left with fewer tools to handle another crisis, should one arise.
The result of RBI’s tight money policy is showing in the decline in the business expectations index as companies expect an increase in raw material prices and production costs.
According to RBI’s industrial outlook survey of manufacturing companies in the private sector, the business expectations index for July-September 2008 and for October-December 2008 declined by 2.4% and 2.6%, respectively, over the corresponding previous quarters.
The confidence of manufacturing companies has declined for major indicators such as the overall business and financial situation, availability of finance, production, order books and profit margins.
Availability of finance has been a major constraint for companies.
To address these issues, the central bank recently reduced the cash reserve ratio by 250 basis point to 6.50% releasing about Rs1 trillion into the system.
One basis point is equal to one-hundredth of a percentage. It also reduced its policy rate by 100 basis point to 8%.
Anup Roy contributed to this story.