THIRD QUARTER REVIEW RBI MONETARY POLICY: 08-09

Discussed by: Aseem Sidhu

MONETARY MEASURES• Repo Rate, Reverse Repo Rate, CRR kept unchanged.– Repo rate: 5.5%– Reverse Repo : 4%– CRR: 5%

• Bank Rate kept unchanged at 6%.• FY09 GDP target revised down to 7% with downward

bias.• CONTEXT: Previous FY09 GDP target was 7.5-8.0%.• FY09 Mar-end inflation target below 3%.• CONTEXT: Previous FY09 Mar-end inflation target was

below 7%.

STANCE

• Response to RBI's policy actions in last several months "still unfolding".

• Give comfortable liquidity to meet loan growth consistent with GDP projection.

• Hard to predict every development on uncertain global outlook.

• To maintain vigil, monitor domestic, global events.• To take swift action to minimise global crisis impact.• To take swift action to restore econ to potential

growth path.

GDP Growth• Rate cuts in Nov, Dec, Jan aimed at supporting

econ growth.• Increasing evidence of slackening local econ

activity in Dec.• India growth trajectory impacted by global

financial crisis.• Global crisis impact "deeper, wider" than

expectations.• Service sector may decline more in second half of

FY09.

INFLATION• Commodity, oil price fall reduced local inflation

pressures.• Inflation declined on global commodity price fall.

LIQUIDITY• RBI to take conventional, unconventional steps to

keep comfortable liquidity.• CRR cuts since Sep has released 1.6 trln rupees.• RBI steps since Sep boosted liquidity worth 3.88

trln rupee.• SLR cut freed 400 bln rupee of liquid funds for

loan growth.

First Views

Parijat Agrawal, head-fixed income, SBI Mutual Fund

• In line with our expectations• GDP and inflation will be lower than what RBI

has predicted• If the situation does not improve, RBI can go

for rate cuts• ample liquidity in the system

First Views

Sunil Malhotra, vice-president finance of Omaxe Ltd

• There is liquidity in the system• Banks are not lending to the extent required

to real estate companies in specific, and the industry in general.

• Still room for rate cuts

Further Analysis

• Takes time for effects to be felt• Sufficient liquidity in the banking system• Banks not passing on the benefits– Rates constrained by deposit rates– Low lending by private sector banks, foreign banks

• Dr. Subbarao has kept flexibility intact

References

• Newswire 18 - THIRD QUARTER REVIEW RBI MONETARY POLICY: 08-09

• Business Line – January 28th