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