Reserve Bank Of India Plant Life Explanation Rates Unmoved - July 28, 2009

The RBI on Tuesday kept the key policy rates unchanged but increased the inflation forecast to 5 per cent. RBI kept the repo rate, at which the central bank lends cash to banks, at 4.75 per cent and the reverse repo rate, at which it absorbs surplus cash from the banking system, stays at 3.25 per cent, according to the Q1 Monetary Policy. Moreover, the RBI also kept the cash reserve ratio unchanged at 5.00 percent.

The deposit growth is seen at 19 per cent and the review has said that there is scope for the banks to slash interest rates. The SLR also remains unchanged at 24 per cent.

The GDP is expected to grow at 6 per cent while the money supply growth is seen at 18 per cent, according to the quarterly review of the economy.

Since October, RBI has cut its short-term lending rate by 425 basis points in six steps. The RBI also slashed the reverse-repo rate by 275 basis points since early December and reduced the cash reserve requirement by 400 basis points to 5 percent to keep credit flowing.

RBI Likely To Widen Repo, Reverse Repo Margin

MUMBAI: The Reserve Bank of India (RBI) has hinted at measures to widen the spread between the rates at which it borrows from and lends to banks. This is aimed at giving the regulator more headroom to move either way, given the uncertainties in global markets.

Currently, RBI borrows from banks at 6% through the reverse repo auction and it lends to banks at the rate of 7.75%. The margin can be widened by either increasing the repo rate or reducing the reverse repo rate. Speaking to reporters on Friday, RBI governor YV Reddy pointed out, “By and large, uncertainties would continue. And as of now, it is not clear when things will get normal or a little less abnormal.

In situations where there are lesser uncertainties, it helps to have a smaller corridor between the repo and reverse repo rates and vice versa.” The governor was speaking on the sidelines of a function, where Bank of Mauritius governor Rundheersing Bheenick was delivering an address.

Mr Reddy said that it’s sometimes difficult to guess the magnitude of the uncertainties arising out of the subprime crisis in the US. The central bank governor said that policy makers, across the globe, are cooperating to ensure that the uncertainties meet an early end, but the ultimate source of comfort can come only from the US.

Mr Reddy emphasised that monetary policy management becomes difficult in India, given the fiscal deficit and a large current account deficit. He reiterated that it has been stressed in the recent policy review that rising oil and food prices would exert pressure on price levels.

Speaking on forex derivatives issues, Mr Reddy pointed out that the central bank had been flagging the risks involved in these products. He added that the regulator had been involved in an interactive supervisory role. However, the sensitivity towards these risks is growing more rapidly in recent times, he said.

Incidentally, Standard and Poor’s (S&P) on Friday, estimated that write-downs on account of the subprime crisis could reach $285 billion. According to S&P, the total market value of write-downs of subprime asset-backed securities (ABS) write-downs disclosed so far by financial institutions — banks, brokers, and insurers — well exceeds $150 billion, globally. S&P has estimated that the valuation write-downs of subprime affected ABS could reach $285 billion for the global financial sector.

The governor of Bank of Mauritius highlighted the challenges faced by Mauritius due to unprecedented foreign fund inflows. He pointed out that monetary authorities in Mauritius are currently revisiting their policy framework. Bank of Mauritius is considering the option of increasing the tenure of its special deposit facility and may increase the differential to 200 basis points (from 145 bps) below the key repo rate (9% currently).

Mr Bheenick said that the bank is in talks with other central banks to develop a liquid and deeper market for forex swaps. “We are encouraging investors to take away the focus from the local market and look for opportunities outside Mauritius to boost fund outflows. It is becoming increasingly difficult to distinguish hot money flows from those of a more permanent nature,” he said.

Inflation Increases To 3.83%

Wholesale price index-based inflation rate grew by 3.83 per cent for the week ended January 12, as prices of manufactured goods and some food articles edged up. Inflation is still below Reserve Bank''s forecast of close to 5 per cent for the fiscal, and bankers expect the central bank to soften its monetary policy stance when it comes up for review on January 29. Inflation rate for the week ended January 5 was 3.79 per cent and 6.15 per cent in the year-ago period. CRR rate could be left unchanged, as there is enough liquidity in the system, Barua stated, adding that further interest rate cut by the US Federal Reserve is not ruled out when it meets on January 30.