Mumbai, Jan 29 (Inditop.com) Shifting its stand from an accommodative monetary policy to managing inflation, pegged at a high 8.5 percent by end-March, India’s central bank hiked a key policy rate Friday to suck Rs.36,000 crore ($7.2 billion) out of the system.
The cash reserve ratio, which is the minimum liquid assets commercial banks have to retain against deposits, will stand revised to 5.75 percent in two phases — up 50 basis points from Feb 13 and another 25 basis points from Feb 27.
All other policy rates remain unchanged.
Presenting the final monetary policy update for this fiscal, Reserve Bank of India (RBI) Governor D. Subbarao said the liquidity cut will anchor inflationary expectations even as the recovery process will be supported without compromising on price stability.
Accordingly, the central bank governor sharply raised the projected annual inflation rate at the end of this fiscal to 8.5 percent from 6.5 percent that was predicted in the previous monetary policy update three months ago
But he was upbeat on the prospects for India’s economic growth and projected the gross domestic product to expand by an impressive 7.5 percent in 2009-10 against the earlier projection of 6 percent.
“Assuming a near-zero growth in agricultural production and continued recovery in industrial production and services sector, the baseline projection for gross domestic product growth for 2009-10 is now raised to 7.5 percent.”
This, he said, gave enough comfort to change the focus of the monetary policy.
“A consolidating recovery should encourage us to clearly and explicitly shift our stance from ‘managing the crisis’ to ‘managing the recovery’,” the central bank governor said.
“Though the inflationary pressures in the domestic economy stem predominantly from the supply side, the consolidating recovery increases the risks of these pressures spilling over into a wider inflationary process.”
The strong views by Subbarao on the need to change focus from an accommodative monetary policy to strict vigil on monetary expansion, which has the potential to lower the amount of credit available to industry, left the markets jittery.
The unexpected hike in the cash reserve ratio, for example, saw the benchmark sensitive index (Sensex) of the Bombay Stock Exchange plummet nearly 325 points, or almost 2 percent, before staging a marginal recovery.
But the industry was divided on the impact of a shift in policy change, with the Federation of Indian Chambers of Commerce and Industry (FICCI) saying it will impact on job creation, but the other two apex chambers welcoming the steps.
“The central bank has performed a fine balancing act by not increasing policy rates to support the economic recovery process,” said Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII).
“The policy, which also gives clear indications that it will gradually withdraw from adhering to liberal monetary policy stance, is in the best interests of the nation,” the Associated Chambers of Commerce and Industry (Assocham) added.
The main highlights of the policy update include:
– Cash reserve ratio hiked by 75 basis points to 5.75 percent in two stages
– Move to suck out excess liquidity worth Rs.36,000 crore from system
– Bank rate retained at 6.0 percent
– Repo rate retained at 4.75 per cent
– Reverse repo rate retained at 3.25 percent
– India’s economic growth projection hiked to 7.5 percent from earlier 6 percent
– Annual inflation rate projection hiked to 8.5 percent from 6.5 percent
– Inflation risk looms larger in the context of global price movements
– Reserve Bank to monitor price situation closely and take further action as warranted
– Reduction in excess liquidity to help anchor inflationary expectations
– Recovery process to be supported without compromising price stability
– Central bank focus now on managing recovery from managing crisis
– There is still uncertainty about pace and shape of global recovery
– Stronger global recovery could prop oil prices sharply
– Monetary policy for 2010-11 to be announced April 20
