India Inc disappointed as central bank leaves key rates untouched (Lead)

October 24th, 2008 - 4:18 pm ICT by IANS  

SensexMumbai, Oct 24 (IANS) Asserting that India’s financial system was stable despite challenges from overseas, the Reserve Bank of India (RBI) Friday left interest rates unchanged and projected a lower economic growth of 7.5-8 percent for the current fiscal in its mid-term review of the monetary policy.The cash reserve ratio, or the minimum balance commercial banks have to retain against deposits, was also left untouched at 6.5 percent in the review by RBI Governor D. Subbarao before chief executives of commercial banks.

“This mid-term review is set in the context of several complex and compelling policy challenges. The global financial system is in a crisis of unprecedented dimensions,” he said during the review.

“India’s financial sector is stable and healthy,” he, however, said adding that all financial ratios for commercial banks were sound, even as they were affected only peripherally by the US sub-prime assets crisis.

“Nevertheless, the global developments have had some indirect, knock-on effects on domestic financial markets.”

He said aggregate supply conditions in the Indian economy had also shown notable resilience in the second quarter of this fiscal due to the deteriorating global macroeconomic and financial environment.

“There are, however, growing indications that the underlying economic cycle is turning in tune with global economic developments and that domestic economic activity is straddling a point of inflexion,” he added.

The central bank governor said India’s inflation projection was being maintained at 7 percent keeping in view the supply management steps of the government and the lagged response to the monetary policy measures of the central bank.

“The monetary policy statement is not the last word,” Finance Minister P. Chidambaram said, reflecting on market reactions following the central bank’s review, where a key index of the Bombay Stock Exchange (BSE) crashed close to 900 points.

“I am confident that RBI will act swiftly as and when the situation demands,” the finance minister told reporters outside parliament, soon after the mid-year review was conducted in Mumbai.

The benchmark 30-share sensitive index (Sensex) of the BSE had opened more than 200 points down Friday and then hit a low of 8,940.48 immediately after the RBI announced its mid-term review leaving all key rates unchanged.

By around 2 p.m., the index fell further to 8,872.40 points, with a loss of nearly 900 points, or 9.20 percent.

“By announcing a slew of measures a few days before the scheduled mid-term review, the RBI had created expectations of some more measures,” said portfolio strategist Manoj Krishnan.

“But when they were not met, the markets crashed,” said Krishnan, who is with the New Delhi-based financial services firm Price Investment Management and Research Services.

Reacting to review, the Associated Chambers of Commerce and Industry (Assocham) said the repo rate, or the interest changed for borrowings by banks, should have been lowered by 100 basis points and CRR cut by 50 basis points.

“The suggested measures would have infused required liquidity into the system as the chamber has been constantly receiving reports from all segments of Indian industry that banks are still scared to lend,” Assocham president Sajjan Jindal said.

“We continue to think that growth and financial stability concerns should decisively outweigh inflation concerns,” said Tushar Poddar, vice president of Asia Economics Research at Goldman Sachs.

“The large fall in commodity prices, slowdown in demand, and the extraordinary fall in asset prices suggest to us that inflation will slow sharply going forward, and fall under 6.5 percent by March 2009,” he said.

“Lending will increasingly become a problem for banks. We also expect the pressures for depreciation on the rupee (INR) to continue in the short term.”

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