Mumbai: The Reserve Bank of India (RBI) on Tuesday left its key policy rates unchanged, in the quarterly review of its credit policy, and said there are progressive signs of economic recovery. It however warned that the overall scenario continued to be uncertain with fiscal consolidation posing a challenge.
The Cash Reserve Ratio (CRR), the repo rate, as well as the reverse repo rate all stay at their current levels – 5 percent, 4.75 percent, and 3.25 percent respectively.
While CRR is the amount of funds banks have to keep on deposit with the RBI, the repo and reverse repo rates are shot-term rates at which banks lend and borrow from RBI, respectively.
The repo and reverse repo rates, introduced in 2000, were last cut by 25 basis points in RBI’s April monetary policy review. The CRR, on the other hand, was last cut by 50 basis points in January.
The bank rate, used by banks to price long-term loans, remained at 6 percent.
The credit policy is on the expected lines as analysts had projected Governor D Subbarao would not tinker with the key policy rates.
The RBI has further projected a growth rate of 6 percent for the 2009-10 fiscal with an upward bias.
Further, the central bank has warned that inflation is likely to be about 5 percent by end-March 2010, compared to an earlier projection of 4 percent.
"It is worth reiterating that the Reserve Bank will maintain an accommodative monetary stance until there are definite and robust signs of recovery," said Subbarao, adding a strict vigil will be kept on inflation.
On the way forward, the RBI says it is looking to maintain accommodative monetary stance until robust signs of recovery visible
The RBI in its credit policy further stated that commercial banks have the scope to cut lending and deposit rates further, adding that it will actively manage liquidity to avoid govt borrowing crowding out private credit demand.
"As liquidity remains ample, the competitive pressure
on banks to reduce lending rates has increased," Subbarao said.
The Governor pointed out that there have been more
cases of policy rate changes leading to banks lending rates
since the annual policy announcement in April this year.
He said banks had earlier contracted short-term deposits
at higher rates. However, "as these deposits mature and get
repriced, it opens up room for banks to further reduce
their lending rates," he said.
He estimated that the lending rates could have been at
least one percentage point lower than what they are now.
It also indicates that M3 money supply may grow at 18 percent, while bank credit may rise by 20 percent in 2009-10.
A day ahead of the review, the central bank had sharply raised its growth forecast for the country`s economy but had also warned that inflation could also move into higher territory.
The bank also said yesterday food prices - that are already high, particularly in the case of fruits, vegetables and lentils - were likely to move northward given the feeble progress of monsoon and the hike in minimum support price paid to farmers for their crops.
"There are indications of inflation firming up by the end of the year due to the waning base effect of last year, increase in commodity prices, delayed progress of monsoon potentially driving up food prices," it said.