Markets Down After No Change in Credit Policy


Agencies

Mumbai, Oct 24: After infusing Rs 1,85,000 crore liquidity into the banking system this month, RBI on Friday surprised the market by keeping its key rates unchanged in the mid-term review of annual monetary policy, which lowered economic growth projections to 7.5-8 per cent for 2008-09.

With the global commodity and oil prices cooling, the central bank kept the inflation projection unchanged at 7 per cent by end-March but emphasised that inflation continued to be a matter of concern requiring constant "vigil."

Outlining the monetary measures, the policy said the benchmark bank rate has been kept unchanged at 6 per cent, repo rate at 8 per cent, reverse repo at 6 per cent and CRR at 6.5 per cent.

On October 11, the apex bank cut CRR, the percentage of amount banks are required to park with the central bank, by 2.5 per cent -- from 9 per cent to 6.5 per cent -- to inject Rs 100,000 crore liquidity into the system. It reduced repo rate, the rate at which RBI lends short-term funds to banks, by one per cent to 8 per cent on October 20.

Several banks have already indicated after the CRR and repo rate cut that they would take call on reducing their interest rates after the credit policy.

Soon after the credit policy was announced markets reacted negatively. Bombay Stock Exchange’s Sensex was down over 700 points.

In the face of the global financial turmoil, Reserve Bank, in its mid-term review, said that the developmental and regulatory polices of the central bank would continue to adopt a holistic approach to the responsibility of price and financial stability.

"The RBI is committed to deepening and expanding reforms in the financial sector so that efficient and competitive financial intermediation evolves to secure sustained growth with stability," the RBI said.

The policy has set its focus on issues such as development of various segments of financial markets and strengthening the financial market infrastructure, further liberalisation of forex transactions and relaxation of interest rate ceilings of NRI deposits.

Besides, it focuses on strengthening the regulatory framework of cross-border supervision and surveillance of banks' credit portfolios, the apex bank said.

Terming the global financial situation as the worst since the Great Depression, the RBI said it has been proactive and has taken measures to manage the rapid developments and ease pressures stemming from it.

"The RBI is confident of managing the situation and minimising the adverse impact of the global crisis on the Indian economy," it said.

"Our financial system is strong and healthy and our economic fundamentals are strong. Once the global situation is managed, and calm and confidence are restored, we will return to our higher growth trajectory," the review said.

The monetary tightening measures announced earlier this week by the RBI have seen the inflation rate easing to 11.07 per cent from 11.44 per cent last week.

However, one big worrying factor is the unprecedented depreciation of the rupee against the US dollar. Today, the Indian currency fell to a low of 50.15 to the dollar due to heavy losses in Asian and domestic stock markets, which has raised concerns of more outflows.

Meanwhile, US stocks clawed back from five-year lows on Thursday, led by a bounce in energy and healthcare stocks after oil recovered from a 16-month trough and top pharmaceutical companies posted reassuring earnings.

The Dow Jones Industrial Average rose 172.04 points, or 2.02 per cent, to end at 8,691.25, Standard & Poor's 500 Index gained 11.34 points, or 1.26 per cent, to finish at 908.12 and the Nasdaq Composite Index was down 11.84 points, or 0.73 per cent,
to close at 1,603.91.

Asian markets slumped for a third day with the Nikkei losing as much as 4 per cent. The broader Topix fell 4.35 per cent, Straits Times shed 3.56 per cent and Hang Seng was down 3.93 per cent. 

  

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