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Business Environment
Third Quarter Review of Monetary Policy
(2008-09)
Since India is integrated into the global system and had global
linkages with the rest of the world, not only in trade terms
but also through flow of money between India and other
countries. And just because of this simple reason India
cannot remain untouched or unaffected from the global
crisis and hence India has to face uncertainty like the rest
of the world.
This Global crisis is affecting India in several ways. It has been
observed that in first half of the financial year, i.e. in 2008-
09, the inflation rate was very high. But as a result of
slowdown the inflations rates have started falling down
drastically. The global financial crisis, economic slowdown,
and falling commodity prices affected the Indian economy
in several ways:
a. Capital Flow Reversals intensified in September –
October 2008.
b. Industrial production growth has slackened.
c. Export growth has turned negative during October
– November 2008.
d. International credit channels continued to be
constrained.
e. Capital market valuations remained low.
f. And overall business sentiments have
deteriorated.
But on the flip-side,
a. Inflation has come down.
b. Domestic financial markets are functioning in
orderly manner.
Although bank credit is higher than during the previous year,
rough calculation shows that flow of overall financial resources
to the commercial sector in the current financial year has
declined marginally as compared with the previous year. This
was on account of decline in other sources of funding such as
resource mobilisation from the capital market and external
commercial borrowings.
With all this both the Government and the RBI have acted
promptly since September so as to avoid the adverse impact of
the crisis. Government announced two major fiscal packages,
while RBI took measures to provide ample rupee liquidity,
ensure comfortable dollar liquidity and maintain a monetary
policy environment conducive for the continued flow of credit to
productive sectors i.e. it ensured that the sectors which are
productive should not be hit by the global crisis thus RBI took
measures to pump in ample liquidity so that these sectors keep
on growing.
However, the measures aimed at increasing the rupee liquidity
include:-
a. A significant reduction in Cash Reserve Ratio,
b. A special repo window under Liquid Adjustment Facility
for
i. Banks for on-lending to mutual funds (MFs),
ii. Non-banking financial companies (NBFCs), and
iii. Housing finance companies (HFCs).
c. A special refinance facility that banks can access
without any collateral.
d. In addition, a Special purpose vehicle (SPV) has been
set up to provide liquidity support to non-banking
financial companies (NBFCs).
Measures aimed at managing foreign exchange include:-
a. Upward adjustment of the interest rate ceilings on
i. the foreign currency non-resident (banks)
[FCNR(B)],
ii. Non- Resident (external) rupee account
[NR(E)RA] deposits.
b. Substantially relaxation of the external commercial
borrowings (ECB) regime, allowing NBFCs/HFCs
access to foreign borrowing.
c. Allowing corporates to buy back foreign currency
convertible bonds (FCCBs) to take advantage of
the discount in the prevailing depressed global
markets.
d. The Reserve Bank has also instituted a rupee-
dollar swap facility for banks with overseas
branches to give them comfort in managing their
short-term funding requirements.