The Reserve Bank of India Governor, D. Subba Rao, while presenting the statement on Annual Policy for the fiscal 2010 Tuesday, cut the repo rate and reverse report rate by 25 basis points each. As per today's decision, the repo rate was reduced to 4.75% from 5%, and that of reverse repo rate to 3.25% from 3.5% with immediate effect.

The apex bank also chose to leave the key Cash Reserve Ratio unchanged at 5.0%, while maintaining the bank rate at 6.00%.

However, the Reserve Bank retains the discretion to conduct repo/reverse repo auctions at a fixed rate or at variable rates as circumstances warrant.

The central bank has projected inflation for the fiscal 2010 in the range of 4.0% to 4.5%, keeping in view the global trend in commodity prices and domestic demand-supply balance. However, the report added that over the medium-term, the policy was aimed at keeping inflation around 3%.

The RBI said it was committed to providing ample liquidity for all productive activities on a continuous basis. Accordingly, for policy purposes, money supply (M3) growth for fiscal 2010 was placed at 17%. Consistent with this, RBI expects the credit growth for the fiscal 2010 to grow by 20%, while deposit growth is estimated at 18%.

The fiscal and monetary stimulus measures initiated during 2008-09, coupled with lower commodity prices, could cushion the downturn in the growth momentum during the fiscal year 2010 by stabilizing domestic activity somewhat. With the India Meteorological Department forecasting a favorable Southwest monsoon, for policy purpose, India's central bank expects fiscal 2010 GDP growth to be at around 6%.

The last Annual Policy Statement of the RBI, made in April 2008, placed real GDP growth for fiscal 2009 in the range of 8% to 8.5%. As the year progressed and the crisis unfolded, economic prospects rapidly deteriorated globally and domestically, forcing the apex bank to lower its growth projection to 7.5% from 8% in its mid-term review in October 2008. As the downward risks have since materialized, the RBI now projects the GDP growth for 2008-09 to be in the range of 6.5% to 6.7%.

RBI said there is still ample scope for banks to reduce their lending rates, especially with the current WPI inflation rate nearing zero. It, therefore, urged scheduled banks to strive to reduce their benchmark prime lending rates (BPLR) further. A committee is formed to review the BPLR system.

The biggest challenge for the RBI will be to manage the surge in government- borrowing. Having invested over Rs.120,000 crore or around $24 billion in open market operations and MSS unwinding, the RBI said it would need to use all the debt management tools to manage government-borrowing

The RBI has also stressed on the need for maintaining credit quality through the downturn. It has warned that the slowdown could lead to an increase in the share of the non-performing loans for banks.

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