RBI’s Annual Monetary Policy Review 2008-09

RBI announced its monetary policy for the financial year 2008-09. The highlights are here and the detailed policy is here.

The much awaited decision on interest rates is:

  • Bank Rate, Reverse Repo Rate and Repo Rate kept unchanged.
  • Scheduled banks required to maintain CRR of 8.25 per cent with effect from the fortnight beginning May 24, 2008.
  • RBI didn’t change the policy rates but just increased CRR. This implies RBI is more concerned over excessive liquidity and believes that interest rates have peaked. Higher policy rates could further slow the growth.

    Prior to the policy, I had pointed thatRBI was into a dilemma. The markets expected that inflation is going to be around 7%-7.5% over 2008-09 and this would warrant a hike in interest rates. RBI’s preferred inflation is around 4.5% to 5% and the expected numbers are much higher. But growth rates have moderated across sectors (it is still high relative to the world) and a further hike could slower growth further.

    So, any change in rates could harm either inflation or growth. Still, the Bloomberg/Reuters Polls showed RBI would take a hawkish stance over rising inflation and hike rates. By not increasing rates RBI is trying to balance growth and inflation.

    What however worries me is that RBI expects inflation to be around 5.5% in 2008-09 which looks really difficult looking at the present numbers

  • Inflation to be brought down to around 5.5 per cent in 2008-09 with a preference for bringing it close to 5.0 per cent as soon as possible. Going forward, the resolve is to condition policy and perceptions for inflation in the range of 4.0-4.5 per cent so that an inflation rate of around 3.0 per cent becomes a medium-term objective.

    RBI has also announced prudential measures to address banks exposure to commodity markets and look at special purpose vehicles/off balance sheet activities of banks.

  • I will keep adding to this post as I am still reading the report.

    The viewers should also take a look at Macroeconomic and Monetary developments released yesterday.

     Addendum:

    Another important point to note is that RBI’s targetted growth in Money Supply (M3) is 16.5% -17%. Chapter 3 of Macroeconomic and Monetary developments shows the M3 growth. It is about 21% in 2007-08. Hence, RBI might be taking some more measures to suck excess liquidity from the system.  

    2 Responses to “RBI’s Annual Monetary Policy Review 2008-09”

    1. Interest Rates » RBI’s Annual Monetary Policy Review 2008-09 Says:

      […] Read the rest of this great post here […]

    2. kumari chandni Says:

      if price inflation rate is coming down then why the prices of grains and vegitable is high. we know that our country’s most people are really belongs to BPL families. they are APL on paper only.

    Leave a Reply

    Fill in your details below or click an icon to log in:

    WordPress.com Logo

    You are commenting using your WordPress.com account. Log Out /  Change )

    Google photo

    You are commenting using your Google account. Log Out /  Change )

    Twitter picture

    You are commenting using your Twitter account. Log Out /  Change )

    Facebook photo

    You are commenting using your Facebook account. Log Out /  Change )

    Connecting to %s

    This site uses Akismet to reduce spam. Learn how your comment data is processed.


    %d bloggers like this: