India’s central bank sees 6 percent growth, cuts key rates (Roundup)

April 21st, 2009 - 6:25 pm ICT by IANS  

KPMG New Delhi, April 21 (IANS) India’s central bank Tuesday predicted the economy would grow by 6 percent in the current fiscal. It cut key rates by 25 basis points and asked commercial banks to provide cheaper loans to industry and consumers.
In the annual review of the monetary policy, Reserve Bank of India (RBI) Governor D. Subbarao said commercial banks had not responded in equal measure to prior rate cuts, aimed at reducing the cost of credit and infusing more funds into the financial system.

“Banks should play their role by passing on the benefits of lower lending rates to borrowers,” Subbarao told reporters.

The governor also said growth in the Indian economy would be moderate this fiscal. “With the assumption of normal monsoon, real GDP growth for 2009-10 is placed at around 6 percent,” Subbarao.

Some of the salient features of RBI annual policy review:

* Repo rate cut by 25 basis points to 4.75 percent

* Reverse repo rate cut by 25 basis points to 3.25 percent

* GDP growth for 2009-10 to be around 6 percent

* GDP growth for 2008-09 at 6.5-6.7 percent

* Annual rate of inflation to be four percent be end of March 31, 2010

* Inflation to turn negative in early part of 2009-10

* Negative inflation may not persist beyond mid-2009-10

* Consumer price inflation to be in positive territory this fiscal

* Cash reserve ratio remains unchanged

* Foreign currency convertible bond buyback limit increased to $100 million

* External commercial borrowing ceiling relaxation extended

* Current foreign bank policy to remain, review to happen once world economy recovers

* Money supply growth for 2009-10 predicted at 17 percent

The repo rate is the rate at which the RBI borrows from the banks, while the reverse repo rate is the interest rate paid to banks for RBI’s borrowings from them.

Cash reserve ratio is the minimum cash reserve balance banks must maintain against customer deposits.

Analysts and industry welcomed the cuts but said they were doubtful of how effective they would prove to be.

“Whilst these are meant to discourage interbank placements and encourage funds flow to the corporate sector, I do not think these would end up achieving its purpose,” said Abizer Diwanji, KPMG financial services head.

“These cuts are only to signal RBI’s intent to banks to lend at lower interest rates,” added Diwanji.

Corporate India said the cuts were expected but the central bank could have done better in its yearly review of the economy.

“The cut in the repo rate could have been steeper because of the strong cushion provided by the extremely comfortable position with regard to inflation,” said president of Federation of Indian Chamber of Commerce (FICCI) Harsh Pati Singhania.

Some analysts were also of the view that even now, the banks may not cut rates, until they were comfortable with the economic condition.

“Moral suasion by the RBI will continue but banks will lend more only when they are comfortable with the scenario,” said D.K. Joshi, principal economist at credit rating agency CRISIL.

“It’s natural for the banks to be cautious in the wake of a credit crisis and risk still high, while it is the RBI’s duty to tell them to bring down lending rates,” Joshi added.

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