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Saturday, August 01, 2009

RBI maintains status quo on policy rates


As expected, the Reserve Bank of India (RBI) kept all policy rates unchanged, as it seeks to bolster economic growth amid persistent worries over the precarious global situation. Still, the central bank warned that inflation will start spiking up from later this year as the economy revives and the low base effect starts tapering off. The reverse repo rate was left unchanged at 3.25% while the repo rate was kept steady at 4.75%. These are at their historically lowest levels. The Bank Rate has been retained unchanged at 6%. The cash reserve ratio (CRR) of scheduled banks has been retained unchanged at 5% of net demand and time liabilities (NDTL).

The RBI said that it will maintain an accommodative monetary stance until there are definite and robust signs of recovery. This accommodative monetary stance is, however, not the steady state stance, the central bank said in a statement. On the way forward, the RBI will have to reverse the expansionary measures to anchor inflation expectations and subdue inflationary pressures while preserving the growth momentum. The exit strategy will be modulated in accordance with the evolving macroeconomic developments, the central bank said.

RBI Governor D. Subbarao said that a prolonged budget deficit can crowd out private investments and trigger inflation, and urged the Government to lay out a roadmap to trim the budget shortfall, including details on revenue and expenditure targets. The immediate challenge is to provide ample cash in the banking system for companies and Government borrowings to support growth, while at the same time control the potential build-up of inflationary pressures on the way forward, Subbarao said.

Since mid-September 2008, the RBI has reduced policy rates significantly: the repo rate by 425 basis points and the reverse repo rate by 275 basis points. The CRR was also reduced by 400 bps of NDTL of banks.