RBI leaves lending rates remain untouched

vIndianz.com (21 Oct, 2009) — Worried over creeping inflation, the RBI on Tuesday somewhat tightened its monetary policy for this fiscal whilst retaining main policy rates, by signs of an industrial revival providing the required cushion.

An increase of 100 base points in the statutory liquidity ratio, whilst maintaining status quo on every other policy rates and reserve ratios were the key points of the half-yearly evaluation of the policy conducted by Reserve Bank of India (RBI) Governor D Subbarao in Mumbai.

“Like always, the Reserve Bank will make an effort to make sure price stability and anchor inflation potential,” Governor Subbarao told the chief executives of commercial banks at the central bank’s headquarters here.

“It bears prominence that the Reserve Bank is watchful of its primary obligation to price stability. It will maintain to observe the price condition in its entirety and will take actions as defensible by the developing macroeconomic circumstances promptly and successfully.”

Some other highlights of the evaluation include:

1. Bank rate remained unaffected at 6 percent
2. Repurchase rate remained untouched at 4.75 percent
3. Reverse repurchase rate was unaffected 3.25 percent
4. Cash reserve ratio left unaffected at 5 percent
5. Statutory liquidity ratio increased to 25 percent from existing 24 percent
6. Vigil on inflation trends to react promptly and successfully
7. Observe liquidity condition intimately and supervise it dynamically
8. Retain a command of price and financial constancy with support for development

Sensing some likely tinkering with the reserve ratios, the sensitive index (Sensex) of the Bombay Stock Exchange (BSE) opened lower at 16,699.09 points on Tuesday, against the earlier close at 16,740.50 points and fell more to 16,586.30 points.

Shortly after the policy was unveiled, the index was quoting at 16,654.7 points, suffering a loss of 85.8 points, or 0.51 percent, more than the earlier close.

Similarly, the broader 50-share S&P CNX Nifty of the National Stock Exchange was also ruling lower at 4,944.8 points, as in contrast to Monday’s close at 4970.90, suffering a loss of 26.1 points, or 0.43 percent.

The repo rate, presently at 4.75 percent, is the interest charged by the Reserve Bank on borrowings by the private banks. An increase in the same increases the cost of borrowings for commercial banks.

The reverse repo rate, presently at 3.25 percent, is the rate at which the RBI borrows money from profit-making banks. A hike in this rate makes it more beneficial for banks to store resources with the central bank.

An increase in statutory liquidity ratio makes it compulsory for the banks to invest more finances in particular securities, against their deposits, and sips away a little liquid cash from the financial organization.

Before April 21, the repo rate and the reverse repo rate were suddenly slashed by 50 basis points to 5 percent and 3.5 percent, correspondingly, March 4 as part of the monetary motivation to help the Indian economy countenance the challenges posed by the global meltdown.

Even it was preceded by a cut of 100 basis points each in the two policy rates on Jan 2, even as the cash reserve ratio was condensed by 50 basis points.

• Sweden’s Riksbank Raises Rate a Sixth Time to Limit Inflation – Bloomberg
• India’s Inflation Accelerates – Wall Street Journal
• Bank of Thailand surprises with rate rise; baht up – Reuters
• Food inflation eases to 18.65%; prices to cool down in New Year
• EU Raises Inflation Estimate, Increasing Pressure on ECB – Bloomberg
• Fed’s Williams Says Banks Reluctant to Increase Lending in Slow Recovery – Bloomberg
• Fed’s Williams Says Banks Reluctant to Increase Lending in Slow Recovery – Bloomberg
• Fed’s Williams Says Banks Reluctant to Increase Lending in Slow Recovery – Bloomberg
• Sentance warns on ‘optimistic’ Bank forecasts – Financial Times
• 7.31% inflation indicator confusing: ADB

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