India’s central bank holds key rates, cuts growth target (Roundup)January 27th, 2009 - 7:15 pm ICT by IANS
Mumbai, Jan 27 (IANS) India’s central bank Tuesday left all key interest rates unchanged and lowered the country’s growth target to 7 percent for this fiscal even as it promised to act “swiftly” as and when the situation demanded.In a quarterly review of the monetary policy, Reserve Bank of India (RBI) Governor D. Subbarao also said in no uncertain terms that the Indian economy will have to share the uncertainties in the global financial system like other nations.
“As an integral part of a globalising world, India cannot be expected to remain immune to a global crisis of this nature and magnitude,” Subbarao said in his review statement.
“In responding to the crisis, India has to share the uncertainty on the way forward just like the rest of the world,” he said, adding: “The initial hope that the crisis could be contained in the financial sector has been belied.”
He said he was leaving unchanged all the key rates, including the benchmark bank rate, the repurchase rate, the reverse repurchase rate, the cash reserve ratio (CRR), as well as the statutory liquidity ratio (SLR).
The repo rate, currently at 5.5 percent, is the interest charged by the RBI on borrowings by the commercial banks. A reduction in the same lowers the cost of borrowings for commercial banks.
The reverse repo rate, currently at 4 percent, is the rate at which the central bank borrows money from commercial banks. A lowering of this rate makes it less lucrative for banks to park funds with the central bank.
The CRR, now at 5 percent, is the minimum cash commercial banks have to retain against deposits, while SLR, the amount such institutions have to maintain in the form of government securities, is at 24 percent.
A cut in these two rates helps inject more money into the financial system.
“There is further scope of interest rates being brought down both by banks who have already done so and by the ones who have not done so far,” Subbarao said, referring to how commercial banks had responded to its earlier rate cuts.
The decision not to lower interest rates, however, had little impact on stock markets. The sensitive index (Sensex) of the Bombay Stock Exchange closed at 9,004.08, with a gain of 3.8 percent over the previous close.
The specific index for banking stocks also closed higher by 2.91 percent, even as leading bankers said they expected the central bank to cut rates before the end of this fiscal.
But the Indian industry said it was unhappy with the central bank’s decision to keep the rates unchanged, since the corporate sector was looking at access to more credit at affordable rates.
“The demand creation and liquidity availability is still an issue but will remain so until interest rates are further moderated,” said Sajjan Jindal, president of the Associated Chambers of Commerce and Industry (Assocham).
“This was clearly a window of opportunity, as it would have served to further stimulate the confidence building measures initiated by the government and the RBI in the recent past,” said the Federation of Indian Chambers of Commerce and Industry (FICCI).
In the review, the central bank governor also lowered India’s growth projection of 7.5-8 percent to 7 percent on account of impact of global meltdown, even as he maintained that headline inflation would drop to 3 percent by end-March.
He also warned that amid the central government’s fiscal deficit may balloon to 5.9 percent of GDP from 2.5 percent, while that for states, collectively, may rise to 2.6 percent, as their budgeted revenue surplus may not materialise.
Subbarao said the central bank had been intervening at regular intervals since September last year and that its moves had resulted in injecting additional liquidity worth Rs.3.88 trillion (Rs.388,000 crore/$77.5 billion).
The central bank governor said there were some positive signs as well in the country’s financial system unlike in other countries where non-functional and frozen financial markets were at the heart of the crisis.
“In sharp contrast to their international counterparts, the financial system in India has been resilient and stable,” he said, adding there was some tightness in liquidity only between mid-September and early-October.
“The response to the Reserve Bank’s policy actions over the last several months is still unfolding. As demonstrated in recent past, the Reserve Bank will act swiftly and decisively as and when evolving external and domestic conditions so warrant.”