Tuesday, October 27, 2009

>RBI POLICY PREVIEW OCTOBER 2009 (EDELWEISS)

Policy rates likely to remain untouched: The Reserve Bank of India (RBI), on October 27, 2009, will go in for a half-yearly review of the Annual Monetary Policy announced in April. The October policy review is not expected to result in any change in key policy rates and reserve requirements—repo rate (4.75%), reverse repo rate (3.25%), and cash reserve ratio (CRR, 5%). Of keen interest will be any indication on the timing and manner of a likely ‘exit’ from the expansionary measures pursued by the central bank. We believe RBI will have to undertake some tightening measures in Q4FY10.

Economy shows resilience; growth sets in………….: For the bulk of H1FY09, monetary policies across emerging economies, including India, were fighting inflation and managing excess liquidity. H2FY09, on the other hand, shifted focus to reviving growth. Accordingly, accommodative policies and stimulus injections shielded economies from further upheavals and facilitated growth stabilisation. All along, the Indian economy showed much more robustness than most peers, with Q1FY10 clearly reflecting a return to the growth trajectory, strongly led by recovery in the industrial sector. Around this time, policy actions that yielded reasonably low interest rates extended the much required impetus to growth. The last quarter also witnessed concerted efforts by RBI and the government in moral suasion of banks to reduce interest rates and attend to the credit needs of industry, without compromising on quality. Sentiments were pumped when RBI, in its previous review, assigned an ‘upward bias’ to its 6% GDP growth projection for FY10.

Maintain accommodative policy rates; nurture incipient growth

………..but, inflation fuels concerns: While growth has bounced back, domestic conditions have gradually begun to warrant a need to revisit some of the expansionary policies adopted by the central bank during the past one year. Inflation expectation is one such concern that is gaining centre stage. With the headline inflation number being largely misleading at the moment, all eyes are fixed on other pressures that could further fuel inflation. RBI’s inclination of keeping a check over such expectations was clearly evident when it raised its March-end inflation projections for 2010, on the back of mounting pressures from food articles’ prices, in addition to tweaking its policy stance which is as follows:

• Managing liquidity actively so that government’s credit demand is met while also ensuring flow of credit to the private sector at viable rates.

• Keeping a vigil on the trends and signals of inflation and being prepared to respond quickly and effectively through policy adjustments.

• Maintaining a monetary and interest rate regime consistent with price stability and financial stability supportive of returning the economy to the high growth path.

To read the full report: RBI POLICY PREVIEW

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