Thursday, March 5, 2009

RBI cuts key rates, interests may soften further

The Reserve Bank on Wednesday cut its key overnight lending and borrowing rates by 50 basis points each with immediate effect, signalling banks to further soften interest rates. Read More

Impact of global financial crisis and subsequent economic downturn has turned out to be deeper and wider than anticipated earlier:

Policymakers expect India's economy to grow at a six-year low of 7.1 percent in the 2008/09 fiscal year that ends on March 31, after growing at or above 9 percent in the previous three years.

Analysts expect the economy to slow further in 2009/10.

On Friday, data showed growth in the December quarter slowed to an annual 5.3 percent, its slowest in nearly six years. Read More

The cut in reverse repo rate will force banks to lend more to industry which is badly in need of funds:

Keki Mistry, Vice-Chairman and MD, HDFC, feels there are two reasons for RBI to cut rates. "One, inflation is down to a real low. So by the time we get to June, one would probably look at a negative inflation number because of the base effect. The second factor could be the low GDP growth that we saw in the last quarter."

He feels the reverse repo rate cut is more relevant than RBI's repo step. "Currently, there are not too many banks that are borrowing under the repo window because there is so much liquidity in the system. So, everyone is parking money back to RBI through the reverse repo window. Hence, the reduction in the reverse repo is more relevant than the reduction in the repo rate because this means that there will be a further disincentive for banks to just go and park the money with RBI. It will mean that banks will be more willing to go out and lend money to industry, which is the need of the hour." Read More

So, what lies ahead for Indian economy?

According to Business Today, some feel that this is just the beginning of more bad news in 2009 as the full effect of the recession in the West hasn’t been felt over here as yet.

This is compounded by the fact that credit markets have become clogged and show no signs of easing up lending to consumers. Plus, banks are still not willing to extend much needed liquidity to credit-starved companies.

My readers in US, are telling me for a while that in India we are living in a lie. Now, it looks like that we have started accepting that we were too optimistic and now we are left with no option but to accept the reality. Please, share your views in the comments. (Comments Policy)

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