RBI's First Quarter Review of Monetary Policy 2013-14

In its first quarter monetary policy review for FY14 held on July 31st 2013, the Reserve Bank of India (RBI), India’s central bank, decided to leave the policy repo rate unchanged at 7.25 %. The cash reserve ratio (CRR) of scheduled banks was left unchanged at 4.0% of net demand and time liabilities (NDTL).

Projections:

• GDP Growth:5.5% from 5.7%
• Inflation: 5.5%
• M3 Growth (Velocity of Money): Retained at 13%
• Deposit Growth: Retained at 14%
• Credit Growth: Projected growth at 15%

Monetary Policy Stance:

• To address the risks to macroeconomic stability from external shocks;
• To continue to address the heightened risks to growth;
• To guard against re-emergence of inflation pressures; and
• To manage liquidity conditions to ensure adequate credit flow to the productive sectors of the economy.

Guidance:

The policy stance in this review is guided by the need for continuous vigil and preparedness to pro-actively respond to risks to the economy from external developments, especially those stemming from global financial markets, while managing the trade-off posed by increased downside risks to growth

The recent liquidity tightening measures by the Reserve Bank are aimed at checking undue volatility in the foreign exchange market and will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation

The RBI stands ready to use all available instruments to respond swiftly to any adverse development.

The priority of the RBI in this policy review, like the last one, was to address risks to macro-economic stability from external shocks. Though it noted that inflation has moderated and growth remains weak, the sharp depreciation in the rupee due to capital outflows and uncertainty in the global environment remains a pressing concern.


Risk factors:

The following have been cited as risks to RBI’s macro-economic outlook

The Current Account Deficit (CAD) is currently well above the sustainable level of 2.5% of GDP for three years in a row. For 2012-13, the CAD was 4.8% of GDP, RBI believes that any future announcements of qualitative easing (QE) tapering increases the possibility of further capital outflows. As a result, financing of the CAD becomes a serious macro-economic risk.

Weak investment climate: Business sentiment and investor confidence remain subdued. Moreover, policy bottlenecks continue to stall investment plans, bringing growth under pressure.

Inflationary risks: Supply constraints, particularly in the food and infrastructure sectors continue to pose inflation pressure. The upward push from "imported" inflation due to rupee depreciation and the hike in administered prices could pose risks in coming months.

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State Bank of India hikes Lending Rates by 25bps

In significant development, the largest bank of India State Bank of India has hiked the lending rates by 25 bps making the loans dearer for the customers.

The state bank of India has also hiked the deposit rates by 100bps or up to 1 per cent.

Most of the bank have hiked their lending rates following hike in the interest rates by the Reserve Bank of India last month.

The headline inflation was recorded at 9.06 in May 2011. To control the inflation in India the RBI has changed the interest rates ten times.

With the hike in the lending rate now customers need to pay more for their loans - home loan, auto loan, personal loan etc.,

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RBI announces Annual Policy Statement for the year 2008-09

The Governor of Reserve Bank of India Dr. Y. Venugopal Reddy has presented today the Annual Policy Statement for the year 2008-09 on April 29, 2009, according to the media reports. The RBI has taken measures to tackle the inflation in its annual policy. The RBI has raised the Cash Reserve Ratio (CRR) by 25 basis points and Scheduled banks required to maintain CRR of 8.25 per cent with effect from the fortnight beginning May 24, 2008. This measure aims to check the credit flow in the country. The central bank, however, kept the repo and reverse repo rates unchanged.

Some of the highlights of the Annual Policy Statement for 2008-09 are as follow:

• Bank Rate, Reverse Repo Rate and Repo Rate kept unchanged.
• Scheduled banks required to maintain CRR of 8.25 per cent with effect from the fortnight beginning May 24, 2008.
• GDP growth projection for 2008-09 in the range of 8.0- 8.5 per cent.
• Inflation to be brought down to around 5.5 per cent in 2008-09 with a preference for bringing it close to 5.0 per cent as soon as possible. Going forward, the resolve is to condition policy and perceptions for inflation in the range of 4.0-4.5 per cent so that an inflation rate of around 3.0 per cent becomes a medium-term objective.
• High priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while sustaining the growth momentum.
• Swift response on a continuous basis to evolving adverse international and domestic developments through both conventional and unconventional measures.
• Emphasis on credit quality and credit delivery while pursuing financial inclusion.
• Deposits projected to increase by around 17.0 per cent or Rs.5,50,000 crore during 2008-09.
• A clearing and settlement arrangement for OTC rupee derivatives proposed.
• Currency futures to be introduced in eligible exchanges in consultation with the SEBI; broad framework to be finalised by May 2008.
• Indian companies to be allowed to invest in overseas in energy and natural resources sectors.
• Reserve Bank of carry out supervisory review of banks' exposure to the commodity sector.

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