Review of Monetary Policy

Diwali Crackers were already exhausted

Diwali gift of 250 bps cut in CRR bringing in Rs.1,00,000 crores into the banking system and 100 bps cut in Repo Rate was announced little before the Mid Term Review. Hence, there are no changes in the key rates by the RBI.

Other Highlights

GDP forecast for 2008-09 revised to 7.50-8.00% (currently 7.90% against previous year’s 9.20%)

Inflation projection for the end of March 2009 at 7.00% (currently 11.40% against previous year’s 7.80%)

Moderation of money supply (M3) to 17% during 2008-09 (currently 20.30% against previous year’s 21.90%)

Trade of Interest Rate Futures will be introduced by early 2009.

External Commercial borrowings (ECBs) limit is enhanced under the automatic route.

Cost limit for ECBs is also enhanced.

Domestic Oil and Shipping Companies permitted to hedge their freight risk with overseas exchanges /OTC markets.


Stance of the Policy

From the review, it appears that RBI wants to balance its objectives of financial stability, price stability and growth.

With the inflation still being in double digits and Money Supply being well above the target of 17%, RBI is not comfortable in cutting interest rates further.

RBI wants to ensure sufficient liquidity in the system through the Repo window.

At the same time, it appears that RBI will not hesitate to take some unconventional measures such as cutting SLR and increasing FII limits to stimulate growth.

Banks may not alter their lending/deposit rates for time being.

Oil companies may be able to save some percentage of their costs through the provision of hedging.


Even though there have been relaxations to enhance the Forex inflows, it will be difficult to arrest the dwindling Forex reserves.