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ShareMumbai: The Reserve Bank of India (RBI) has clearly spelled out its intention to keep interest rates down and maintain high liquidity in the system in order to achieve the objective of bringing the economy back on the growth track.
It believes that while the economy is showing signs of stability the downside risk to growth remains. Hence, until signs of sustainable growth emerges, RBI will continue to maintain an accommodative policy stance.
On the inflation front, the RBI has highlighted its concerns on inflation on the back of rising global commodity and domestic foodprices.
The RBI believes inflation expectations are well anchored given the weak aggregate demand in the domestic as well as the global economy.
The bond market went into the policy review with a negative outlook on the back of worries of RBI looking to turn neutral on its policy stance and on the back of worries of inflation expectations.
The ten-year benchmark bond yields had moved up 10 bps from 6.86% levels to 6.96% levels over the week leading up to the policy. Given RBI's softer-than-expected policy stance, bond yields are likely to stabilise at higher levels with a positive bias.
The large government borrowing program has negated RBI's accommodative policy stance with ten-year yields ruling at 7% levels, 200bps higher from lows of 5% seen at the beginning of the calendar year.
The high yields can potentially affect credit demand.
RBI has clearly underlined it favours a low interest-rate regime and will use alltools available to enable the government borrowing to go through smoothly and thereby ensure lower interest rates for the rest of the economy.This implies yields will be capped at current levels.
The government borrowing program is going through smoothly without disrupting banks balance sheets.
The statutory liquidity ratio of the banking system stands at 26.9% of net demand and time liabilities, against a requirement of 24%.
The levels are close to historically low levels with the banking system traditionally running SLR at around 30% of NDTL.
RBI has helped the borrowing along by purchasing bonds worth Rs 33,000 crores. It has indicated that they can purchase of total of Rs 80,000 crores of bonds in the first half of fiscal 2009-10.
The government has targeted a borrowing of Rs 299,000 crores for the first half of fiscal 2009-10 of which it has completed Rs 200,000 crores of borrowings. The balance left for the next two months is Rs 99,000 crores.
RBI has revised upwards the money supply and deposit growth targets by 1% to 18% and 19%, respectively. The higher money supply and deposit growth target indicate higher demand for government bonds from the banking system. The rest of the government borrowing is expected to go through smoothly with genuine investor demand and with help from the RBI.
The bottomline is that RBI will maintain an accommodative policy implying their preference for lower interest rates in the economy. They will maintain a dovish stance till they clearly see growth tending to overshoot targets and inflation running higher than expectations.
