credit policy
overview
| coop banks
| basics
|
lending
|adv banking
| products
| IT
& banking
daily news |
banking software|
bank directory|
internet banking|
IT directory|
banknet jobs
First Quarter Review of Monetary Policy click here
First Quarter Review of Monetary Policy 2009-2010
-Announced on the 28th July 2009
I. Macroeconomic and Monetary Developments
Interest Rates
41. Since mid-September 2008, the Reserve Bank has reduced policy rates significantly: the repo rate by 425 basis points and the reverse repo rate by 275 basis points. The CRR was also reduced by 400 basis points of NDTL of banks (Table 15).
42. Taking cues from the reduction in the Reserve Bank’s policy rates and the easy liquidity conditions, all public sector banks, most private sector and foreign banks have reduced their deposit and lending rates. The reduction in term deposit rates between October 2008 and July 20, 2009 has been in the range of 125-325 basis points by public sector banks, 100-375 basis points by private sector banks and 125-300 basis points by five major foreign banks. The reduction in the range of BPLRs was 125-275 basis points by public sector banks, followed by 100-125 basis points by private banks and 125 basis points by five major foreign banks (Table 16).
43. The frequency distribution of reduction in BPLRs by banks shows that most public sector banks reduced their BPLR by 200 basis points, most private sector banks by 100 basis points and most foreign banks by 50 basis points (Table 17).
44. The movement in the BPLRs does not fully and accurately reflect the changes in effective lending rates as nearly two-thirds of banks’ lending takes place at sub-BPLR rates. The Reserve Bank’s discussions with banks reveal that ample liquidity in the system and the subdued demand for bank credit have increased the competitive pressure on them to lend at sub-BPLR rates. Rough estimates show that the effective average lending rate for the scheduled commercial banks has declined from 12.3 per cent in March 2008 to 11.1 per cent by March 2009. The effective lending rate is expected to have declined further in Q1 of 2009-10. In effect, the BPLRs of banks have turned out to be the maximum lending rates in most cases, distorting their information content. Currently a Working Group (Chairman: Deepak Mohanty) is examining the BPLR system.
Financial Markets
45. Since October 2008, interest rates have declined across the term structure in the money and government securities markets. The call money rates have remained near or below the lower bound of the LAF corridor from November 2008. Primary yields on Treasury Bills have also moderated (Table 18).
46. The secondary market yield on the 10-year government security, however, crept up from 5.82 per cent in January 2009 to 6.57 per cent in March 2009 and further to 7.00 per cent in July 2009 on the back of the large market borrowing programme of the Government. Lower yields on Treasury Bills and higher yields on longer tenor government securities steepened the yield curve (Chart 3).
47. The foreign exchange market has remained orderly during 2009-10 (up to July 24, 2009) with the rupee exhibiting a two-way movement against major currencies. On the whole, the rupee appreciated by 5.3 per cent against the US dollar and 1.6 per cent against the Japanese yen, whereas it depreciated by 8.9 per cent against the pound sterling and 1.7 per cent against the euro (Chart 4). In terms of movement in indicators of the real exchange rate, the six-currency trade-based real effective exchange rate (REER) (1993-94=100) moved up from 96.25 at end-March 2009 to 100.18 by July 24, 2009 and remains competitive.
48. During 2009-10 so far, the domestic equity markets have been on the rise reflecting the global trend and increased optimism regarding the Indian economy. FIIs have made net investment of US$ 7.8 billion in 2009-10 (up to July 22, 2009) as against net disinvestment of US$ 4.0 billion during the corresponding period of 2008-09. The BSE Sensex increased from 9,709 at end-March 2009 to 15,379 on July 24, 2009.
Monetary Transmission
49. The efficacy of the monetary transmission mechanism hinges on the extent and speed with which changes in the central bank’s policy rate are transmitted through the term structure of interest rates across markets. While the transmission of policy rate changes by the Reserve Bank has been faster in the money and government securities markets, it has been slow to the banks’ lending rates. This has been a cause for concern. As indicated in the Annual Policy Statement, some of the major factors that impede the transmission of policy rates to the banks’ lending rates are: (i) the administered interest rate structure on small savings, which constrains the reduction in deposit rates; (ii) a substantial portion of bank deposits is mobilised at fixed interest rates, which discourages banks to reduce their lending rates in line with the policy rates; (iii) concessional lending rates linked to BPLRs for some sectors, which make overall lending rates less flexible; and (iv) persistence of the large market borrowing programme of the government, which hardens interest rate expectations. As liquidity remains ample, the competitive pressure on lending rates has increased. Consequently, the transmission of policy rate changes to bank lending rates has improved since the last Annual Policy Statement in April 2009. As the short-term deposits contracted earlier at high rates mature and get repriced, it opens up room for banks to further reduce their lending rates.
External Sector
50. During 2008-09, India’s current account deficit widened to 2.6 per cent of GDP from 1.5 per cent in 2007-08 reflecting a deterioration in the trade balance. As net capital inflows declined sharply from 9.2 per cent of GDP in 2007-08 to 0.8 per cent in 2008-09, reserves declined by US$ 20.1 billion, net of valuation changes, and by US$ 58.0 billion, inclusive of valuation changes (Table 19). The stress was maximum in Q3 of 2008-09 as the deteriorating current account balance was accompanied by net capital outflows, resulting in a substantial drawdown of reserves. The current account position turned around in Q4 of 2008-09 reflecting sharp moderation in international oil prices and sustained invisible surplus. While capital outflows persisted through Q4 of 2008-09, the trend reversed in Q1 of 2009-10.
51. The overall approach to the management of India’s foreign exchange reserves takes into account the changing composition of the balance of payments and endeavours to reflect the ‘liquidity risks’ associated with different types of flows and other requirements. In 2009-10 so far, foreign exchange reserves have increased by US$ 14.2 billion, taking them from US$ 252.0 billion at end-March 2009 to US$ 266.2 billion by July 17, 2009. The increase has largely been on account of valuation changes.
<<< GO BACK TO FIRST PAGE
First Quarter Review of Monetary Policy 2009-2010... click here
Highlights of 1st Quarter Review of Monetary Policy 2009-2010... click here
RBI CREDIT AND MONETARY POLICIES (1999-2010)... click here
Advertise
| Book Store |
About us |
Contact us
| Terms of use | Disclaimer
© Banknet India |
All rights reserved worldwide.
Best viewed with IE 4.00 & above at a screen resolution of 800 x 600
or higher