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RBI announces Further Monetary Stimulus: Cuts Repo Rates by 50 bps

Background to announcement of present monetary stimulus by RBI :

The Reserve Bank has been constantly monitoring global developments along with the domestic economic situation. On the positive side, inflationary pressures have eased significantly. Inflation as measured by year-on-year variations in the wholesale price index (WPI) has declined to 3.36 per cent as on February 14, 2009, down by about three-fourths from the high of 12.91 per cent as on August 2, 2008. However, consumer price inflation, as reflected in various consumer price indices, is in the range of 9.85-11.62 per cent as of December 2008-January 2009, has yet to show moderation. Consumer price inflation has remained at elevated level due to increase in primary articles prices. With WPI inflation having moderated significantly, consumer price inflation may also be expected to decline, though with a lag.

At the same time, there is evidence of further slowing down of economic activity. Exports registered negative growth for the four recent consecutive months, October 2008-January 2009. Overall exports growth during 2008-09 (April-January) at 13.2 per cent was significantly lower than 24.2 per cent during the same period of the last year. The index of industrial production (IIP) registered a negative growth of 2.0 per cent during December 2008, with the manufacturing sector returning a negative growth of 2.5 per cent. IIP growth during April-December 2008 at 3.2 per cent was about one-third of 9.0 per cent during the corresponding period of the previous year due to slowdown in all the major sectors. Real GDP growth in the third quarter of 2008-09 (September-December 2008) has been placed at 5.3 per cent by the Central Statistical Organisation (CSO). The services sector, which has been the main engine of growth during the last several years, has also been slowing down. Business confidence has been dented significantly and investment demand has decelerated.

Non-food bank credit growth reached a peak of 29.4 per cent (Rs.5,82,344 crore) on a year-on-year basis as on October 10, 2008 as compared with 23.3 per cent (Rs. 3,74,054 crore) as on October 12, 2007. Subsequently, year-on-year non-food bank credit growth decelerated to 24.3 per cent as on December 19, 2008, as credit expansion during the period between October 10, 2008 and December 19, 2008 at Rs. 30,889 crore was much lower as compared with Rs. 1,05,774 crore during the corresponding period of the previous year. According to the latest data, non-food bank credit has decelerated further to 19.7 per cent (y-o-y) as on February 13, 2009 as compared with 22.7 per cent as on February 15, 2008 as credit expansion during the period between December 19, 2008 and February 13, 2009 at Rs. 8,091 crore was sharply lower than that of Rs. 86,978 crore in the corresponding period of the last year. At this level, non-food bank credit expansion remains below the indicative projection of 24.0 per cent in the Third Quarter Review of the Monetary Policy. The total flow of resources to the commercial sector from banks and non-banks during 2008-09 so far (up to February 13, 2009) at Rs.4,98,136 crore was lower than Rs.6,08,351 crore during the corresponding period of the last year.

Even as some public sector and private sector banks have cut lending rates in response to the Reserve Bank’s monetary policy stance, concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth. The Reserve Bank continues to urge banks to monitor their loan portfolio and take early action, to prevent asset impairment down the road and safeguard the gains of the last several years in improving asset quality. At the same time, banks should price risk appropriately and ensure that creditworthy enterprises continue to get funding.

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