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RBI Starts Exit From Easy Policy But Holds Rates

27 October, 2009

The Reserve Bank of India (RBI) on Tuesday began the first phase of its exit from expansionary policy by ending some liquidity support measures taken when the global crisis hit Asia’s third-largest economy harder than expected, but left key policy rates unchanged.

 
Effective immediately, it ended a special repurchase facility for banks and another for the funding needs of non-bank financial companies, mutual funds and housing finance companies.
 
It also ended a forex swap facility for banks, and cut an export credit refinance facility to a pre-crisis level of 15 percent from 50 percent with immediate effect.
 
It raised the statutory liquidity ratio of commercial banks to 25 percent from 24 percent effective Nov. 7, and said the collateralised borrowing and lending obligation liabilities of banks would be subject to cash reserve ratio requirements from Nov. 21.
 
It raised the statutory liquidity ratio of commercial banks to 25 percent from 24 percent effective Nov. 7, and said the collateralised borrowing and lending obligation liabilities of banks would be subject to cash reserve ratio requirements from Nov. 21.
 
“The balance of judgement at the current juncture is that it may be appropriate to sequence the exit in a calibrated way so that while the recovery process is not hampered, inflation expectations remain anchored,” the RBI said in its quarterly review.
 
“The ‘exit’ process can begin with closure of some special liquidity support measures,” it said.
 
As expected, the RBI left the repo rate at 4.75 percent and the reverse repo rate at 3.25 percent. The cash reserve ratio was held steady at 5.0 percent.
 
Analysts polled by Reuters expected the RBI to keep key rates unchanged in its quarterly review to push growth in Asia’s third-largest economy.
 
The RBI cut its short-term lending rate by 4.25 percentage points in six steps between October and April. The reverse repo rate, at which the RBI absorbs surplus cash, has been cut by 2.75 percentage points in four steps since December.
 
India’s economic growth slowed to 6.7 percent in the year through March after three years of growth at 9 percent or more. Government officials forecast the economy to grow at about 6.5 percent this fiscal year.
 
While inflation remains benign, it is expected to surge in coming months on high food prices and as the base effect from last year’s high energy and commodity prices eases.
 
A government panel last week forecast inflation to reach about 6 percent by the end of the fiscal year, although some economists have said that figure could rise to about 8 percent.
 
While the RBI’s comfort level for inflation is seen at about 5 percent, the RBI has been under pressure from the government to keep monetary policy loose to foster growth.
 
Raising rates would also make it more expensive for India to finance a fiscal deficit running at 6.8 percent of GDP, which is being funded by a record borrowing programme.

 


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RBI Starts Exit From Easy Policy But Holds Rates

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