RBI’s Third Quarter Monetary Policy. CRR Raised By 75 Bps.

India’s Central Bank, Reserve Bank of India (RBI) announced its Monetary Policy on Fri, Jan 29, 2010 and decided to raise CRR by 75 bps to 5.75%.

As expected, Central bank, Reserve Bank of India has raised Cash Reserve Ratio (CRR) by 75 bps to 5.75% and keeps its policy rates unchanged as per the expectations of VMW, however the hike in CRR is well above, what we had anticipated. While the global economy is stabilizing, the growth outlook has been revised. Economies have rebounded steadly after the significant government intervention. Over the past two years, RBI has reduced the policy rates and CRR in response to the economic crisis to infuse the sufficient amount of liquidity into the market to emerge from the dried liquidity situation and to provide the ample credit facility to the economy to impede the greater risk of economic trouble for the second fastest growing economy in the world. The general trend of CRR (shown below), shows, how the central bank has responded to the economic trouble. During the reign of YV Reddy, CRR jumped to 9 per cent in Aug 2008 just before the bankruptcy of Lehman Brothers to absorb the additional liquidity in order to prevent the Indian companies (banks & companies) to invest outside into the risky assets.

 

After few days, Duvvuri Subbarao has taken over the charge of RBI and he decided to reduce interest rates by more than 400 bps, when the financial crisis was at peak. Overall, the RBI has predominantly managed the situation mightily and helped the Indian companies to grow even in a gloomy economic period to a certain extent. Now this time, RBI raised the CRR as the Inflation rate is again at the alarming levels. India’s spiralling money supply over the past few months has grew by more than 22 per cent which is again the another matter of concern, which the RBI is taking it seriously to contain the the rise in prices. Rise in CRR would not likely affect the cost of borrowing as the banks are sitting on ample liquidity and shifting to the demand deposits to reduce their cost. Bank’s CASA , Time Deposit ratio has been shifted very aggresively post economic recession to reduce their cost. However, over the next few quarters, RBI may hike the Repo rate and Reverse Repo rate if the inflationary pressure continues.

Developing Asia To Be Buoyant To The Global Downturn, Says Asian Development Bank.

Developing Economies in the Asian region would be more resilient to the global downturn than was initially thought, the major ADB report says.

A man talks on his cell phone past the electronic stock board of a securities firm in Tokyo, Japan, Friday, Aug. 14, 2009. Japan's Nikkei 225 stock average rose 80.14 points, or 0.8 percent, at 10,597.33, the highest close since Oct. 3. (AP Photo/Itsuo Inouye)Asian Development Bank on Tuesday has published its report on the Asian Region forecasting the economic growth for year 2009 and 2010 at 3.9% and 6.4% respectively. According to the ADB, despite the worsening economic situation, developing Asia is poised to lead the recovery from the worldwide slowdown. Active response from the government and healthy financial system in the region has fuelled the economic growth and insulated the region from the worst economic crisis to certain extent.

India Economy in particular, ADB has raised the growth forecast from 5 per cent to 6 per cent for the year 2009, and 7 per cent for the year 2010. The key drivers for Indian economy to survive is quicker than expected return on capital, huge capital inflows, increase public spending, Industrial production is improving, however the risk of downside in the economy due to weaker exports, weaker agriculture output expectations has been minimized by the way of announcing stimulus packages and monetary policies which has maintained the financial system in working condition, although the agriculture output is expected to revive by the last quarter. According to the ADB, 2010 would be better for the economy as the industrial economies is supposed to be out of recession, thus the exports will likely to turnaround and it will cut the overall trade deficit.

On the inflation side, as the food prices are soaring due to poor output of crops this year, the report suggest that the government will be able to contain the inflation by importing the appropriate amount of foodgrain, however it would create the chaotic situation for the central bank while coming on to the monetary policy review. Higher CPI would influence the RBI’s monetary decision and hence, the revision in interest rates is expected as the VMW had research earlier. Key valid points which has been outlined by the ADB to broader openness for the economic resilience:

  1. Reinforce Intra-Regional Trade.
  2. Effectively manage financial globalization.
  3. Maximizing the benefits from labor mobilization.

 

 

This report is officially published by the ADB and the content used in this post has been taken from the report of Asian Development Bank. VMW is not intended to disseminate this report and has been published on VMW Blog for the information purpose only for the visitors.