Reserve Bank had no choice but to sit tight: Moody’s

October 24th, 2008 - 9:08 pm ICT by IANS  

New Delhi, Oct 24(IANS) The Reserve Bank of India (RBI) had no choice but to sit tight during the quarterly monetary policy review released Friday, though it led to the steepest ever fall in Indian stock markets, according to global rating agency Moody’s.In the latest mid term policy review, the central bank left repurchase rate, reverse repurchase rate and the cash reserve ratio unchanged at 8 percent, 6 percent and 6.5 percent, respectively.

“The recent slide of the rupee has stopped the central bank from further loosening monetary policy, which may stimulate the economy but increase the risk of capital flight,” Sherman Chan, economist with Moody’s said.

“The rupee has shed more than a quarter of its value breaking the important psychological level of $50. This is extremely concerning, from a macroeconomic management perspective, as a weak currency creates inflationary pressures.

“Wholesale price growth, despite gradually easing, is still in double-digit territory, and this is viewed as ‘unacceptable’ by the central bank, whose tolerance rate is set at 5 percent.

In fact, given that the RBI has had four announcements since the last quarterly review in July, it appears that monetary policy changes are now made when necessary, rather than only during set review meetings.

“This is certainly an appropriate strategy, in light of the severe global financial market turbulence during recent months,” Moody’s added.

Added Chanda Kochhar, ICICI Bank: “In the credit policy statement, RBI has indicated it will ‘continue to deploy both conventional and unconventional tools’ to manage the current challenges.”

According to Tushar Poddar, economist with global investment bank and securities firm Goldman Sachs: “The RBI’s actions over the past two weeks, more than the wording of the stance, suggest that it is increasingly worried about financial stability and growth.”

“We continue to think that growth and financial stability concerns should decisively outweigh inflation concerns. 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,” Poddar said.

“However, we believe the risks to growth are strongly to the downside, especially if financial markets do not stabilise quickly.

“We believe lending will increasingly become a problem for banks due to rising credit risk, while companies will progressively find it difficult to borrow due to falling net worth and worsening balance sheets at exactly the time they need capital the most.

“With the growth environment coming under stress, we expect a further easing of the repo rate going forward.

“We also expect the pressures for depreciation on the (Indian) rupee to continue in the short term, although over a 6-12 month horizon we expect it to gain, as the risk aversion and de-leveraging come off,” the Goldman Sachs economist said.

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