RBI expects inflation at 4% by year end; lowers rates to make borrowing cheaper


RBI’s credit policy came with some welcome measures. India’s central bank has taken the following monetary policy measures:

  1. The repo rate has been brought down from 5% to 4.75% with immediate effect. This is the rate at which banks borrow to meet their short term funding gaps from the RBI.
  2. It has also lowered the reverse repo rate, from 3.5% to 3.25%. This is the rate get if banks park their short term surpluses with the RBI.
The RBI has left the cash reserve ratio and bank rate unchanged.
The RBI’s intention is to improve flow of credit to business and to consumers too. Since January 2009, there has been a slowdown in bank credit to the commercial sector. Banks have shown a marked reluctance to lend and also to lower interest rates, in tandem with RBI’s signalling.
RBI’s assessment:
  • Global financial and economic outlook is uncertain. That will mean global financial markets may remain weak, which deprives Indian companies of a source of capital.
  •  Meeting demand for credit from industry is critical. There has been a decline in credit flow and it is also uneven across sectors. Ensuring that all credit-worthy borrowers get funds and small businesses get funding should be the priority of banks.
  • RBI expects some increase in NPAs, in line with higher lending during the preceding years and the slowdown in economic growth.
  • A huge government borrowing programme lies ahead in the current fiscal. RBI is trying to ensure this does not affect liquidity substantially, leaving enough money with banks to lend.
  • RBI is concerned about the slow response of banks to rate reductions. It says that though policy rates are lower than 2004-2007 levels, the deposit and lending rates are higher. RBI expects inflation at around 4% by 2010 and gives enough scope for banks to cut rates and spur lending and an economic recovery.

Read the RBI press release here.

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