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| Ist Quarter Review Of Annual Policy Statement On Monetary Policy – 2008-09 |
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- It seems inflation control is the overriding objective for Reserve Bank of India. That is why it has opted for a contractionary monetary policy approach. On 29th July 2008, the RBI while doing the first quarterly review of its annual statement on monetary policy for 2008-09, increased Repo Rates by 50 basis points and Cash Reserve Ratio (CRR) by 25 basis points. The revised rates along with other rates are as follows.
| Rate |
Change |
Revised Value (%) |
| Cash Reserve Ratio |
Raised by 25 bps |
9.0 |
| Statutory Liquidity Ratio |
Unchanged |
25.0 |
| Repo Rate |
Raised by 50 bps |
9.0 |
| Reverse Repo Rate |
Unchanged |
6.0 |
| Prime Lending Rate |
Unchanged |
12.75–13.25 |
| Bank Rate |
Unchanged |
6.0 |
- The rise in CRR will suck out over Rs.8,000 crores from the system while the hike in repo rate will lead to higher cost of funds for the banks. The CRR hike will be effective from 30th August, 2008 while Repo rate hike will come into effect immediately.
- The banks will be forced to increase their lending rates in order to maintain their margins. As a result, borrowing rates for both corporates and individuals will be higher. Although, firms across the industries will be hit by higher interest cost, severity will be more in the case of EMI-driven industries such as automobiles, housing, etc and capital intensive industries. Higher cost of funds will also bring India’s export competitiveness under pressure. Higher interest rates will also adversely affect the investment plans of the corporate sector.
- Contractionary monetary policy will lead to higher interest rates which in turn will lower the investment and ultimately result in lower GDP growth. Contractionary monetary policy would also mean lower bank credit growth implying lower availability of funds for investment and working capital and thereby affecting the economic activity (GDP) in an adverse manner.
- Rising cost of funds would erode the savings capacity of private (house-hold and corporates) and public sector. This will lead to lower investment and ultimately lower economic growth. However, the RBI is ready to compromise on growth front. No wonder, it has lowered its own growth estimates for the current year from the earlier 8-8.5% to 8.0%.
- The RBI feels that the current inflationary scenario in India is largely on account of higher aggregate demand – an assumption which needs to be seriously contested. The current policy document states that – “…It is important to recognize that in an environment of limited supply elasticities in the short run, an adjustment of overall aggregate demand on an economy-wide basis is warranted to ensure that generalized instability does not develop and erode the hard-earned gains…the RBI’s effort is to smoothen and enable this adjustment so that inflation expectations are contained.”
- The RBI has given itself the task of bringing down inflation rate from its current levels of around 12% to nearly 7.0% by the end of current financial year. This indicates that inflation is not going to come down hurriedly. But the growth rate of GDP, IIP, and investment may decelerate sharply.
- Towards achieving 7% rate inflation, the RBI has fixed different monetary targets for 2008-09. Accordingly,
- Money supply growth is fixed at 17%
- Growth in aggregate deposits will be 17.5%
- Growth of non-food credit will be 20.0%
- At the present, the RBI is more keen on controlling inflation. It may take place even at the cost of growth. To achieve this goal it will, as it has stated explicitly in the policy document, continue with its policy of active demand management of liquidity.
- Should there be no decline in inflationary expectations the RBI could well go for a stricter monetary policy in October 2008.
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Sensex
(03.09.10) |
18238.31 |
| |
(32.44) |
Nifty
(03.09.10) |
5479.4 |
| |
(-6.75) |
Dow Jones
(02.09.10) |
10320.1 |
| |
(50.63) |
Nikkei-225
(03.09.10) |
9062.84 |
| |
(135.82) |
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| WPI (July 2010) |
262.5 |
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(9.97) |
| M3growth (%y-o-y) |
14.7 |
| Repo-Rate (%) |
5.75 |
| Reverse-Repo(%) |
4.5 |
| CRR |
6 |
| Rs./U$ (03.09.10) |
46.67 |
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(0.11) |
| Foreign Exchange Reserves (as on 30.07.2010 US $ Bn.) |
284.2 |
| Brent (U$/bbl.) (03.09.10) |
73.87 |
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(-0.96) |
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| * |
Figures in bracket indicates change over previous value. In case of WPI it is y-o-y change. |
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