of Governor’s Statement to the Press
The global economic
outlook has deteriorated sharply over the last two months. In its World Economic
Outlook, published in early October, the International Monetary Fund (IMF) forecast
global growth of 3.9 per cent in 2008, and of 3.0 per cent in 2009. The IMF has
since revised its forecast for global growth downwards to 3.7 per cent for 2008,
and 2.2 per cent for 2009. Many economists are now predicting the worst global
recession since the 1970s. Several countries, notably the United States, the UK,
the euro area and Japan are all officially in recession. More worryingly, current
indications are that the recession will be deeper and the recovery longer than
2. Confidence in global credit markets
continues to be low, and credit lines remain clogged. The tight and hesitant conditions
in the credit markets are precipitating erosion of demand which, in turn, is feeding
a recession - deflation vicious cycle. Central banks around the world are responding
to the developments by aggressive and unconventional injection of liquidity, monetary
easing and relaxation of collateral norms and eligibility criteria for their lending
to financial institutions.
3. Contrary to earlier expectations
that emerging economies will be affected only marginally, growth prospects of
emerging economies have most definitely been undermined by the ongoing crisis
with, of course, considerable variations across countries. The transmission to
emerging economies is taking place via both trade and financial channels.
Reflecting the contagion of the crisis, the IMF revised its growth forecast for
emerging economies for 2009 to 5.1 per cent, down from its early October figure
of 6.1 per cent.
4. The outlook for India going forward
is mixed. There is evidence of economic activity slowing down. Real GDP growth
has moderated in the first half of 2008/09. Industrial activity, particularly
in the manufacturing and infrastructure sectors, is decelerating. The services
sector too, which has been our prime growth engine for the last five years, is
slowing, mainly in construction, transport and communication, trade, hotels and
restaurants sub-sectors. For the first time in seven years, exports have declined
in absolute terms in October. Recent data indicate that the demand for bank credit
is slackening despite comfortable liquidity. Higher input costs and dampened demand
have dented corporate margins while the uncertainty surrounding the crisis has
affected business confidence.
5. On the positive side, headline
inflation, as measured by the wholesale price index, has fallen sharply, and the
decline has been sustained for the past four weeks, pointing to a faster than
expected reduction in inflation. Clearly, falling commodity prices have been the
key drivers behind the disinflation; however, some contribution has also come
from slowing domestic demand. The reduction in prices of petrol and diesel announced
last night should further ease inflationary pressures. To be sure, consumer price
inflation for the months of September and October did increase. This is possibly
owing to the firm trend in food articles inflation and the higher weight of food
articles in measures of consumer price inflation. Historically there has been
a correlation between wholesale and consumer price inflation, and given this correlation,
consumer price inflation too can be expected to soften in the months ahead.
In response to the evolving global and domestic developments, the Reserve Bank
has taken a number of measures since mid-September 2008. The aim of these
measures was to augment domestic and forex liquidity and to enable banks to continue
to lend for productive purpose while maintaining credit quality so as to sustain
the growth momentum.
7. Measures aimed at expanding
rupee liquidity included significant reduction in the cash reserve ratio (CRR),
reduction of the statutory liquidity ratio (SLR), a special repo window under
the liquidity adjustment facility (LAF) for banks for on lending to non-banking
financial companies (NBFCs), housing finance companies (HFCs) and mutual funds
(MFs), and a special refinance facility which banks can access without any collateral.
The Reserve Bank is also unwinding the Market Stabilization Scheme (MSS) securities
roughly synchronised with the Government borrowing programme in order to manage
8. Measures aimed at managing forex liquidity
include upward adjustment of the interest rate ceilings on the foreign currency
non-resident (banks) [FCNR(B)] and non-resident (external) rupee account [NR(E)RA]
deposits, substantially relaxing the external commercial borrowings (ECB) regime,
allowing NBFCs/HFCs access to foreign borrowing and allowing corporates to buy
back foreign currency convertible bonds (FCCBs) to take advantage of the discount
in the prevailing depressed global markets. 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.
to encourage flow of credit to sectors which are coming under pressure include
extending the period of pre-shipment and post-shipment credit for exports, expanding
the refinance facility for exports, contra-cyclical adjustment of provisioning
norms for all types of standard assets (except in case of direct advances to agriculture
and small and medium enterprises which continue to be 0.25 per cent) and risk
weights on banks' exposure to certain sectors which had been increased earlier
counter-cyclically, and expanding the lendable resources available to the Small
Industries Development Bank of India (SIDBI) and the National Housing Bank (NHB).
10. To improve the flow of credit to productive sectors
at viable costs so as to sustain the growth momentum, the Reserve Bank signaled
a lowering of the interest rate structure by reducing its key policy repo rate
by 150 basis points from 9.0 per cent as on October 19 to 7.5 per cent by November
11. Taken together, the measures put in place
since mid-September 2008 have ensured that the Indian financial markets continue
to function in an orderly manner. The cumulative amount of primary liquidity made
available to the financial system through these measures is over Rs.300,000 crore.
This sizeable easing has ensured a comfortable liquidity position starting mid-
November 2008 as evidenced by a number of indicators. Since November 18, the LAF
window has largely been in the absorption mode. The weighted average call money
rate has come down from a recent high of 19.7 per cent on October 10 to 6.1
per cent on December 5. The overnight money market rate has consistently remained
within the LAF corridor (6.0 per cent to 7.5 per cent) since November 3. The yield
on the 10 year benchmark G-Sec has declined from 8.6 per cent on September 29
to 6.8 per cent on December 5. Taking the signal from the repo rate cut, the top
five public sector banks have reduced their benchmark prime lending rates (BPLR)
from 13.75 – 14.00 per cent as on October 1 to 13.00 – 13.50 per cent presently.
12. The Reserve Bank has reviewed the evolving macroeconomic
and monetary/liquidity conditions and has decided to take the following further
- It has been decided to reduce the repo
rate under the LAF by 100 basis points from 7.5 per cent to 6.5 per cent and the
reverse repo rate by 100 basis points from 6.0 per cent to 5.0 per cent, effective
December 8, 2008.
- In view of the need to
enhance credit delivery to the employment- intensive micro and small enterprises
(MSE) sector, it has been decided to provide refinance of an amount of Rs. 7,000
crore to the Small Industries Development Bank of India (SIDBI) under the provisions
of Section 17(4H) of the Reserve Bank of India Act, 1934. This refinance will
be available against: (i) the SIDBI’s incremental direct lending to MSE; and (ii)
the SIDBI’s loans to banks, NBFCs and State Financial Corporations (SFCs) against
the latter’s incremental loans and advances to MSEs. The incremental loans and
advances will be computed with reference to outstandings as on September 30, 2008.
The facility will be available at the prevailing repo rate under the LAF for a
period of 90 days. During this 90-day period, the amount can be flexibly drawn
and repaid. At the end of the 90-day period, the drawal can also be rolled over.
This refinance facility will be available up to March 31, 2010. The utilisation
of funds will be governed by the policy approved by the Board of the SIDBI.
- We are working on a similar refinance facility for the
National Housing Bank (NHB) of an amount of Rs 4, 000 crore. We will announce
the details after consideration of the proposal by the Central Board of the Reserve
Bank which is meeting next week.
- On November
15, 2008, the Reserve Bank had announced that proposals by Indian companies for
premature buyback of foreign currency convertible bonds (FCCBs) would be considered
under the approval route, provided that the buyback is financed by the company's
foreign currency resources held in India or abroad and/or out of fresh external
commercial borrowings (ECBs) raised in conformity with the current norms for ECBs.
Extension of FCCBs was also permitted at the current all-in cost for the relevant
maturity. On a review, it has now been decided to permit Authorized Dealers Category
- I banks to consider applications for premature buyback of FCCBs from their customers,
where the source of funds for the buyback is: i) foreign currency resources held
in India (including funds held in EEFC accounts) or abroad and/or ii) fresh ECB
raised in conformity with the current ECB norms, provided there is a minimum discount
of 15 per cent on the book value of the FCCB. In addition, the Reserve Bank will
consider applications for buyback of FCCBs out of rupee resources provided that:
(i) there is a minimum discount of 25 per cent on the book value; (ii) the amount
of the buyback is limited to US $ 50 million of the redemption value per company;
and (iii) the resources for buyback are drawn out of internal accruals of the
company as certified by the statutory auditor.
has been decided that loans granted by banks to Housing Finance Companies (HFCs)
for on-lending to individuals for purchase/construction of dwelling units may
be classified under priority sector, provided the housing loans granted by HFCs
do not exceed Rs.20 lakh per dwelling unit per family. However, the eligibility
under this measure will be restricted to five per cent of the individual bank’s
total priority sector lending. This special dispensation will apply to loans granted
by banks to HFCs up to March 31, 2010.
the current guidelines, exposures to commercial real estate, capital market exposures
and personal/ consumer loans are not eligible for the exceptional regulatory treatment
of retaining the asset classification of the restructured standard accounts in
standard category. As the real estate sector is facing difficulties, it
has been decided to extend exceptional/ concessional treatment to the commercial
real estate exposures which are restructured up to June 30, 2009.
- In the face of the current economic downturn, there are
likely to be more instances of even viable units facing temporary cash flow problems.
To address this problem, it has been decided, as a one time measure, that the
second restructuring done by banks of exposures (other than exposures to commercial
real estate, capital market exposures and personal/ consumer loans) up to June
30, 2009, will also be eligible for exceptional regulatory treatment.
- In view of the difficulties faced by exporters on account
of the weakening of external demand, it was decided that the interest rate on
Post-shipment Rupee Export Credit up to 180 days will not exceed BPLR minus 2.5
percentage points. In respect of overdue bills, banks have been permitted to charge
the rates fixed for Export Credit Not Otherwise Specified (ECNOS) for the period
beyond the due date. It has now been decided that the prescribed interest rate
as applicable to post shipment rupee export credit (not exceeding BPLR minus 2.5
percentage points) may also be extended to overdue bills up to 180 days from the
date of advance.
13. Operational instructions covering
the above measures will be issued separately.
14. The cumulative
impact of the measures in today's package, together with earlier measures, should
be to step up demand and arrest the growth moderation. In particular, the reduction
in the repo/reverse repo rates should result in a reduction in the marginal cost
of funds to banks and enable them to improve the flow of credit to productive
sectors of the economy on viable terms. The liquidity support provided to the
SIDBI under the refinancing arrangement is expected to alleviate the credit stress/tightening
of lending conditions confronting micro and small enterprises and should revive
activity in these employment-intensive drivers of growth. The facility for premature
buyback of FCCBs will help Indian companies to take advantage of the current discounted
rates at which their FCCBs are trading. The special dispensation for treating
loans to HFCs as priority sector lending will boost lending to the housing sector.
The facilities for restructuring exposures will help soften pressures being faced
by the commercial real estate and other sectors in the current environment. The
benefit of the concessional rate of interest available to the exporters up to
180 days irrespective of the original maturity of the export bills is intended
to benefit exporters who have drawn bills for shorter maturities and are facing
difficulties in realizing the bills on due dates on account of external problems.
Given the uncertain outlook on the global crisis, it is difficult to precisely
anticipate every development. The Reserve Bank will continue to closely monitor
the developments in the global and domestic financial markets and will take swift
and effective action as appropriate. The Reserve Bank's policy endeavour will
be to minimise the negative impact of the crisis and to ensure an orderly adjustment.
In particular, we will try to maintain a comfortable liquidity position, see that
the weighted average overnight money market rate is maintained within the repo-reverse
repo corridor and ensure conditions conducive for flow of credit to productive
sectors, particularly the stressed export and small and medium industry sectors.
16. The fundamentals of our economy continue to be strong. Once the
crisis is behind us, and calm and confidence are restored in the global markets,
economic activity in India will recover sharply. But a period of painful adjustment
Press Release : 2008-2009/842