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RBI Credit Policy Research Team | Posted On Wednesday, July 29,2009, 07:31 PM

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RBI Credit Policy



RBI didn’t bring any changes in the key policy rates. By considering the economic recovery from the global downturn, it kept its short-term rates and cash reserve requirement unchanged. The RBI said it would continue with a policy of easy money while the outlook remained uncertain, reassuring a bond market that must absorb a record 4.51 trillion rupees ($94 billion) in government borrowing this year as we expect fiscal deficit to reach 6.8 percent of GDP. It said once a recovery had happened, it would be ready to reverse some expansionary measures to keep a lid on inflation. The central bank (RBI) said it would actively manage liquidity to prevent government borrowing from increasing private demand for credit.

RBI left its lending rate (Repo) unchanged at 4.75 percent, its lowest in nine years, and its reverse repo rate at 3.25 percent (this is the rate at which RBI absorbs surplus cash from the banking system). Both rates were last cut by 25 basis points in April 2009.

The RBI kept the cash reserve ratio (CRR), the amount of funds banks have to keep on deposit with it, unchanged at 5.0 percent. It was last cut by 50 basis points in January 2009. At the same time Statutory Liquidity Ratio (SLR) also kept stable at 24%.

See Also: Role of Government and RBI in Money market

Bank Policy Rates



Bank Rate


Repo Rate


Reverse Repo Rate


Cash Reserve Ratio (CRR)


Statutory Liquidity Ratio (SLR)


Highlights of RBI credit policy

Following are the highlights of RBI Credit Policy.

  • Bank rate retained at 6%

  • Repo rate unchanged at 4.75%

  • Reverse repo rate unchanged at 3.25%

  • Cash reserve ratio unchanged at 5%

  • Statutory liquidity ratio (SLR) unchanged at 24%

  • Inflation is forecast at 5%

  • Negative inflation only a statistical phenomenon

  • Main concern on balance between liquidity and inflation

  • GDP is forecasted at 6%

  • More scope for cutting rates by commercial banks

  • Money supply may grow 18% this fiscal

  • Policy will help to ensure enough commercial credit

Asia's third-largest economy grew 6.7% in the last fiscal. In previous three years the growth was 9 percent and more. Private sector economists expect growth between 5.8 and 7.2 percent this year. Wholesale prices are below last year's levels, it is largely because of the huge fall in oil prices. In July 2008 it was at all-time peaks. But consumer price inflation floats near 8 percent. The central bank said it was unlikely that growth momentum would pick up before the middle of the current fiscal year, but said it expected fiscal and monetary stimulus measures to boost domestic demand in 2009/10.

RBI’s main concern is on balance between liquidity and inflation. To make sure the liquidity RBI is going to increase money supply by 18% in this fiscal. The projected inflation for the year is 5%. This policy will also help to ensure enough commercial credit. The central bank said that commercial banks have scope to lower deposit and lending rates. This will help the borrowers to gets loans with reduced rates.

RBI has mentioned that there is more scope for cutting rates by commercial banks. But this might adversely affect the private sector banks because from the last few months the gap between the deposit rates and the lending rates continue to be far higher and increasing. Banks which have relatively smaller operations may face pressures from the deposit side. Most of the banks believe that the rate cut cycle is over and RBI will hint at an exit strategy by the end of 2009.

As all the rates have kept unchanged stock market didn’t have much effect from the new RBI policy. It does not change anything really for the stock market to look forward to or feel disappointed.

RBI’s decision to keep the interest rates unchanged is a big boon for Real Estate sector since interest rates are at an all-time low. There is enough liquidity in the market, the credit off-take lending is slow, so the bankers will definitely look at providing ways and means to provide stimulus to the economy.

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