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‘India is suffering three shocks’

business Updated: Jan 27, 2009 22:08 IST

Amid expectations of continued monetary policy easing, the RBI Governor, D Subbarao on Tuesday kept all rates unchanged as he reviewed the monetary policy. The forecast for growth of the Indian economy in 2008-09 has been lowered to 7 per cent, with downward risks, from 7.50-8.0 per cent.

Subbarao’s views on what lies ahead:

How grave is the economic downturn globally and domestically?

This third quarter review of the monetary policy of the Reserve Bank is set in the context of a deteriorating global situation and heightened uncertainty about the global financial sector. The IMF, which puts out numbers for global growth, predicted a 2009 global growth of 3 per cent in October 2008, it was 2.2 per cent in November 2008, and I believe another number is going to come out day after tomorrow and there are some indications that could be substantially lower than the last one. That gives an indication of the velocity and the gravity of the downturn.

How is India affected?

India too has been affected in three ways—first is the exit of foreign equity that resulted in capital flow reversals and that put pressure on the exchange. Secondly through drying up of overseas bank credits for both Indian corporates and Indian banks, which shifted credit demand from external sources to the domestic ones. Lastly, exports were hit because of the deceleration of the global economy.

‘Scope for bank rate cut’

Have you taken any new initiative to help the economy?

Apart from the various conventional measures such as adjusting CRR, repo and reverse repo rates and some unconventional methods such as dollar swap facility for banks, we have introduced a new measure in consultation with the government of a special purpose vehicle for non-banking finance companies to the amount of Rs 25,000 crore. The liquidity situation has improved significantly following these measures taken by the RBI since September 2008.

Has RBI taken any measures to get banks to reduce their lending rates to the extent of the policy rate cuts?

Many banks have reduced their lending rates and some are yet to follow suit. The policy leaves further scope for interest rates reduction by the banks. There is a view that bank credit has not expanded or is decelerating. But if you look at the numbers for the first week of January, you can note that bank credit has expanded slightly faster than at this time last year when the number was 22 per cent. On January 2 2009, the year-on-year growth figure stood at 23.9 per cent.