RBI sticks to its guard - Views on News from Equitymaster

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RBI sticks to its guard

Oct 24, 2008

Not wishing to let out too many of its cards after having already had a hectic month, the Reserve Bank of India (RBI) chose to have an in-active stance in its half year review of the monetary policy. Although the central bank has been vocal about some of its key concerns on certain macro and micro issues, it has chosen to keep most of the policy rates unchanged, after having exercised a cumulative reduction of 2.5% in the CRR (cash reserve ratio) in the past month, accompanied by a 1% drop in repo rate. Following are some of the key takeaways from the review.

  • The RBI has promised to ensure an 'optimal balance' between financial stability, price stability and growth. It believes that its inflationary expectations are well anchored to growth targets. Having said that it considers double digit inflation intolerable and endeavours to bring down inflation to a tolerable level of below 5% at the earliest.

  • The central bank has assured that corporate balance sheets are healthy and leverage levels are within normal ranges. The interest burden of corporates too is low by historical standards. On the flip side, however, pressures on liquidity could potentially be a source of vulnerability.

  • Given the recent lack of public confidence in banks, the RBI has also assured that all indicators of financial strength such as capital adequacy, NPAs and return on assets for commercial banks are robust. The overall capital adequacy ratio (CAR) of commercial banks in India is 12.7% per cent, well above the regulatory minimum of 9%. Furthermore, the regulatory mandate of keeping 25% of deposits as SLR and 6.5% as CRR provides an inherent strength to the Indian banks.

  • Finally the RBI has accused the government of misusing public funds and adding to the aggregate demand pressures in the economy. The revenue deficit of the Central Government has already exceeded 177% of the budget estimates. The central bank has insisted on the government addressing this issue by providing subsidies to the public sector oil marketing and fertiliser companies directly in cash rather than issuing oil and fertiliser bonds.

The monetary policy review thus seems to be taking stock of the developments that have unfolded in the recent past and leaves enough headroom for the RBI to maneuver its future course of action based on the outcomes of its recent policy measures. This is particularly so because the Indian central bank is, as in the past, not exactly flowing the footsteps of its global peers.

  • Read the RBI's statement

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