Macroeconomic and Monetary Developments: Second Quarter Review 2009-10
-Released on October 26, 2009
The accommodative monetary policy stance adopted by the Reserve Bank in response to the global financial crisis, particularly post-September 2008, has continued so far in 2009-10. The aim of this policy stance has been to provide ample rupee liquidity, ensure comfortable dollar liquidity and maintain a market environment conducive for flow of credit to the productive sectors.
The liquidity conditions remained in surplus on a sustained basis, which was absorbed by the Reserve Bank through reverse repo operations under the Liquidity Adjustment Facility (LAF).
Growth in broad money (M3) exhibited modest moderation in the recent period, but at 18.9 per cent (as on October 09, 2009) it remained higher than the Reserve Bank’s indicative trajectory of 18.0 per cent for 2009-10.
On the sources side, monetary expansion was driven by the large borrowing programme of the Government, while bank credit to the commercial sector continued to decelerate (with a growth of 10.7 per cent).
Financial markets in India, which functioned normally even at the height of the crisis, posted further decline in risk spreads and higher transaction volumes. The overnight call rate hovered around the floor of the LAF corridor reflecting the abundant liquidity in the system.
In the collateralised segments, namely, market repo and collateralised borrowing and lending obligation (CBLO), interest rates remained below the inter-bank call rates while there was increase in activities. Volumes in the CP and CD markets also increased.
In the government securities market, 80.4 per cent of the net borrowing requirement has been completed so far; weak demand for credit in the private sector and comfortable liquidity conditions helped contain the pressures on yields.
Corporate bond yields increased somewhat but the risk spread fell to the pre-Lehman levels.
In the credit market, the gradual moderation in lending and deposit rates continued through the second quarter of 2009-10. The flow of credit to the private sector, however, remained sluggish due to subdued overall private consumption and investment demand.
Flow of resources from the non-banking sources increased marginally, led by domestic sources in the form of issuance of CPs and private placements.
In the foreign exchange market, the rupee appreciated by about 10.0 per cent against the US dollar over its end-March level.
Equity market outperformed most of the EMEs in terms of the extent of recovery in stock prices seen since April 2009. The primary market activities also picked up significantly, with higher funds mobilised through public issues and private placements, large oversubscription of certain new issues indicating the return of risk appetite in the market, and manifold increase in mobilisation of resources by mutual funds.
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