After infusing Rs 1,85,000 crore liquidity into the banking system this month, RBI on Friday surprised the market by keeping its key rates unchanged in the mid-term review of annual monetary policy, which lowered economic growth projections to 7.5-8 per cent for 2008-09.
With the global commodity and oil prices cooling, the central bank kept the inflation projection unchanged at 7 per cent by end-March but emphasised that inflation continued to be a matter of concern requiring constant "vigil."
Outlining the monetary measures, the policy said the benchmark bank rate has been kept unchanged at 6 per cent, repo rate at 8 per cent, reverse repo at 6 per cent and CRR at 6.5 per cent.
On October 11, the apex bank cut CRR, the percentage of amount banks are required to park with the central bank, by 2.5 per cent -- from 9 per cent to 6.5 per cent -- to inject Rs 100,000 crore liquidity into the system. It reduced repo rate, the rate at which RBI lends short-term funds to banks, by one per cent to 8 per cent on October 20.
Several banks have already indicated after the CRR and repo rate cut that they would take call on reducing their interest rates after the credit policy.
In the face of the global financial turmoil, Reserve Bank, in its mid-term review, said that the developmental and regulatory polices of the central bank would continue to adopt a holistic approach to the responsibility of price and financial stability.
"The RBI is committed to deepening and expanding reforms in the financial sector so that efficient and competitive financial intermediation evolves to secure sustained growth with stability," the RBI said.
The policy has set its focus on issues such as development of various segments of financial markets and strengthening the financial market infrastructure, further liberalisation of forex transactions and relaxation of interest rate ceilings of NRI deposits.
Besides, it focusses on strengthening the regulatory framework of cross-border supervision and surveillance of banks' credit portfolios, the apex bank said.
Terming the global financial situation as the worst since the Great Depression, the RBI said it has been proactive and has taken measures to manage the rapid developments and ease pressures stemming from it.
"The RBI is confident of managing the situation and minimising the adverse impact of the global crisis on the Indian economy," it said.
"Our financial system is strong and healthy and our economic fundamentals are strong. Once the global situation is managed, and calm and confidence are restored, we will return to our higher growth trajectory," the review said.
Elaborating on the uncertainty in the global situation, the Reserve Bank said it was monitoring to maintain domestic financial stability.
RBI will continue to maintain the close vigil on the entire financial system to prevent pressures building up in the financial markets.
"This will include enhancing liquidity if pressures persist. This could also mean curtailing liquidity if the recent liquidity easing measures are seen to have injected excess liquidity, thereby stoking inflationary pressures," the RBI said.
The central bank will also monitor the rate of credit growth and credit quality closely and will, as necessary engage with select banks which are outliers on the norms. On inflation, the RBI said it was still in double digits, which was well beyond RBI's tolerance level and was clearly unacceptable.
It will be the central banks endeavour to bring down inflation to a tolerable level of below five per cent at the earliest while aiming for convergence with the global average inflation of around 3 per cent in the medium term, it said.
With the supply-side measures taken by the government and monetary measures by the RBI over the last one year, the RBI retained the earlier projection of bringing down inflation to 7 per cent by end-March, 2009. Inflation declined to 11.07 per cent for the week ended October 11.
Though the global financial turmoil has reinforced the need for special emphasis on preserving financial stability, the inflation, which is still in double-digits, and moderation in growth continue to be critical policy concerns, the RBI said.
The central task of conducting monetary policy has become more complex than before, with the increasing priority being given to financial stability.
The current challenge is to strike an optimal balance between preserving financial stability, maintaining price stability, anchoring inflation expectations and sustaining the growth momentum, it said.
"To manage this challenge, the Reserve Bank has deployed and will continue to deploy both conventional and unconventional tools," the central bank said in the mid-term review.