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Reserve Bank leaves rates unchanged

— PHOTO: VIVEK BENDRE

LEARNING NEVER STOPS: RBI Governor D. Subbarao at a press conference in Mumbai to announce mid-term review of annual Monetary Policy for 2008-09.

MUMBAI: The Reserve Bank of India on Friday decided to keep all key rates (repo, reverse repo and the Bank Rate) and the Cash Reserve Ratio (CRR) unchanged in its mid-term review of the annual Monetary Policy. The review, the first by the RBI under new Governor D. Subbarao, lowered the growth projections to 7.5-8 per cent for 2008-09 and kept inflation forecast unchanged at 7 per cent by end-March in the face of cooling crude and commodity prices.

Dr. Subbarao reiterated that the financial sector in India is stable and healthy and Indian banks do not have direct financial exposure to the U.S. sub-prime assets.

However, Dr. Subbarao said, “Foreign subsidiaries and foreign branches of Indian banks have suffered some mark-to-market losses on financial instruments due to the general widening of credit spreads. These losses are modest relative to the size of their business. Adequate provisioning has been made for these.”

While announcing the stance of the monetary policy for the remaining period of 2008-09, Dr. Subbarao said that the overall capital adequacy ratio of commercial banks in India is 12.7 per cent, well above the regulatory minimum of 9 per cent and the Basel Accord requirement of 8 per cent. Furthermore, the regulatory mandate of 25 per cent as SLR and 6.5 per cent as CRR provides an inherent strength to the Indian banks. “The most prominent symptom of the problem in the financial sectors of advanced countries has been the freezing up of inter-bank markets. On the contrary, the inter-bank market in India has been functioning in an orderly manner.”

Nevertheless, he said that the global developments have had indirect, knock-on effects on domestic financial markets. Money markets have experienced unusual tightening of liquidity in recent weeks as a result of global developments which were amplified by transient local factors such as advance tax payments.

The foreign exchange market has experienced pressure on account of FII portfolio outflows and the enhanced foreign exchange requirements of oil and fertilizer companies. Constraints in access to external financing as also re-pricing of risks and higher spreads resulted in additional demand from corporates for domestic bank credit with attendant hardening of interest rates across the spectrum. Dr. Subbarao said that the measures announced in the last one month have substantially eased the liquidity stress in domestic financial markets.

The RBI will maintain a close vigil on the entire financial system to prevent pressures building up in the financial markets. This will include enhancing liquidity if pressures persist. This could also mean curtailing liquidity if the recent liquidity easing measures are seen to have injected excess liquidity, thereby stoking inflationary pressures.

The global financial situation, described as the worst since the Great Depression, continues to be uncertain and unsettled. No country can remain unscathed in a crisis of this proportion. This is uncharted territory and experience to date has evidenced the need to go beyond standard or conventional solutions.

The Reserve Bank has endeavoured to be proactive, and has taken measures to manage the rapid developments and ease pressures stemming from the global crisis. The Reserve Bank reiterates that it is confident of managing the situation and of minimising the adverse impact of the global crisis on the Indian economy.

“Against the backdrop of recent global and domestic developments and in the light of measures taken by the Reserve Bank over the last month, we have kept the Bank Rate, the repo rate and the reverse repo rate under the LAF and the cash reserve ratio (CRR) unchanged for the present,” said Dr. Subbarao.

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