Business Standard

A bold statement backed by bold action

MID-TERM MONETARY POLICY 2008-09/ Viewpoint

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The Reserve Bank of India’s (RBI’s) monetary policy review is a bold, responsive and reassuring statement of intent, amply backed by strong action in recent weeks to support the banking sector and the broader Indian economy as it grapples with one of the toughest global financial crises in recent times.

In an immediate response, the policy statement has added financial stability as one of its objectives, in addition to price stability and economic growth. The statement has strongly reiterated that preserving financial stability warrants increasing priority, further saying that the central bank has deployed and will continue to deploy conventional and unconventional tools as demanded by market conditions.

This intent has already been demonstrated by bold action in recent weeks with RBI, largely known for its measured responses, effecting unprecedented reductions in banks' cash reserve ratio (CRR) and its benchmark repo rate along with a slew of other moves to ease liquidity tightness in the market.

The policy itself holds no rate cuts, though in the context of the recent moves, that simply suggests that RBI will act when market conditions demand rather than wait for pre-set policy review dates to move. This again is a strong statement of intent, suggesting RBI's willingness to proactively respond to market conditions.

As one would expect of a vigilant monetary authority, RBI is minutely monitoring global and domestic developments. It is clear that the central bank is constantly analysing the potential impact on India. One must appreciate that in the current environment this is no mean task, hence the need to be ready to respond swiftly to challenges.

This proactive preparedness for the battle is extremely crucial in the current environment. While the Indian banking sector is fundamentally sound, underpinned by a healthy economy, a strong capital base, robust liquidity reserves and quality asset portfolios, it is not completely immune to the global financial turmoil.

The key takeaway from the policy is the sense of assurance that the market receives. The statement has the potential to reassure edgy financial markets of RBI's intent and ability to battle the crisis.

RBI also retains its confidence in the Indian economy's medium and long-term prospects, which sends a strong message to investors, local and foreign.

Neeraj Swaroop, CEO, Standard Chartered India

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