RBI keeps policy rates intact; banks can cut interest rates

Mumbai, Jan 27 (PTI) Reserve Bank of India (RBI) Tuesday
left key rates unchanged in its quarterly review of monetary
policy, saying its easy money policy in the last quarter gave
commercial banks enough scope to cut interest rates further.

While holding policy rates steady despite falling
inflation, the central bank said the rate of rising prices
could slip below 3 per cent by March-end and that the economy
is expected to grow by 7 per cent -- short of the 7.5-8 per
cent it had projected in the October review.

"In fact, the context Tuesday is more testing than at the
time of our October monetary policy review," RBI Governor D
Subbarao told reporters here, noting that the impact of the
global economic crisis was deeper than previously thought.

Unveiling the third quarter review, the central bank said
the monetary policy easing since October had allowed banks
considerable room to respond more actively -- indicating there
was room for banks to cut interest rates further.

"In the space of just one quarter, the repo rate (at which
RBI lends overnight funds to banks) has been reduced from 9
per cent to 5.5 per cent and reverse repo (at which RBI
accepts deposits from banks) to four per cent, thereby
bringing down both of them historically to lowest levels,"
Governor Subbarao said.

"The transmission of the policy interest rates signal has
been effective in the money and G-security markets. However,
the transmission in credit market has so far been subdued,"
RBI said, adding that most banks have reduced lending and
deposit rates to some extend but a few are yet to do so.

Interest rates are showing a downward bias and there is
enough liquidity in the system, State Bank of India Chairman O
P Bhatt said.

The apex bank, meanwhile, extended till September 30 a
refinance facility window to banks towards providing liquidity
support to meet funding needs of mutual funds, non-banking
finance companies and housing lenders by relaxing the
maintenance of SLR up to 1.5 per cent.

A special refinance facility for scheduled commercial
banks (excluding RRBs) was also extended till September 30.
Both the schemes were earlier open only till June 30.

Though the Bank and the government had acted to protect
the economy from the adverse impact of the economic crisis,
RBI said that the downside risks to growth have amplified
because of slowdown of industrial activity and weakening of
external demand as reflected in decline in exports.

Services sector activities are likely to decelerate
further in the second-half of FY'09.

The apex bank also warned that the fiscal measures to
shore up the economy against the global downturn would sharply
widen the fiscal deficit.

"Additional expenditure coupled with foregone revenue
would raise the fiscal deficit from the budget estimate of 2.5
per cent to 5.9 per cent of GDP," it said.

On inflation, RBI said pressure on commodity prices have
abated markedly around the world reflecting slump in global
demand. The wholesale price index is now projected to
decelerate below three per cent by March 2009 against 7 per
cent forecast by it earlier.

On credit conditions, the Central Bank said that the non-
food bank credit (YoY) at 23.9 per cent was higher than that
of 22 per cent as on January 4, 2008.

It said increase in total flow of resources from the
banking sector to the commercial sector was also higher at
23.4 per cent compared with 21.7 per cent a year ago. PTI TEAM
RKM
NNNN