The Reserve Bank of India said its policy regime would enable credit expansion at viable rates while preserving credit quality so as to support the return of the economy to a high growth path.

''On the basis of the overall assessment, the stance of RBI's monetary policy in 2009-10 will broadly be to ensure continuous monitoring of the global and domestic conditions and respond swiftly and effectively through policy adjustments as warranted so as to minimise the impact of adverse developments and reinforce the impact of positive developments,'' the RBI release said.

The RBI said it would strive to maintain a monetary and interest rate regime that is supportive of price stability and financial stability, taking into account the emerging lessons of the global financial crisis.

Over the last several months, the RBI has been actively engaged in policy action to minimise the impact of the global crisis on India. 

''The policy response of the Reserve Bank has helped in keeping our financial markets functioning in a normal manner and in arresting the growth moderation. The Reserve Bank will continue to maintain vigil, monitor domestic and global developments, and take swift and effective action to minimise the impact of the crisis and restore the economy to a high growth path consistent with price and financial stability,'' it said.
 
RBI's annual policy statement for 2009-10 is set in the context of the the global economic crisis challenging several fundamental assumptions and beliefs governing economic resilience and financial stability. What started off as turmoil in the financial sector of the advanced economies has snowballed into the deepest and most widespread financial and economic crisis of the last 60 years.

''With all the advanced economies in a synchronised recession, global GDP is projected to contract for the first time since the World War II, anywhere between 0.5 and 1.0 per cent, according to the March 2009 forecast of the International Monetary Fund.''

The World Trade Organisation (WTO) has forecast that global trade volume will contract by 9.0 per cent in 2009.

Governments and central banks around the world have been forced to use both conventional and non-conventional fiscal and monetary measures to respond to the crisis. Many of these have been criticised as being led by national interests alone.

The G-20, which met twice since February this year, have committed to take decisive, co-ordinated and comprehensive actions to revive growth, restore stability in the financial system, restart the impaired credit markets and rebuild confidence in financial markets and institutions.

''Even so, the global financial situation remains uncertain and the global economy continues to cause anxiety for several reasons. There is as yet no clear estimate of the quantum of tainted assets, and doubts persist on whether the initiatives underway are sufficient to restore the stability of the financial system.  There is continued debate on the adequacy of the fiscal stimulus packages across countries, and their effectiveness in arresting the downturn, reversing job losses and reviving consumer confidence,'' RBI said.

''Many major central banks have nearly or totally exhausted their conventional weaponry of calibrating policy interest rates and are now resorting to unconventional measures such as quantitative and credit easing. Given the erosion of the monetary policy transmission mechanism, there are concerns about when and to what extent monetary response, admittedly aggressive, will begin to have an impact on reviving credit flows and spurring aggregate demand,'' it added.  

Like all emerging economies, India too has been impacted by the crisis, and by much more than what was expected earlier, RBI said, adding ''The impact of the crisis on India evidences the force of globalisation as also India's growing two-way trade in goods and services and financial integration with the rest of the world.''

After posting annual average growth rate of 8.9 per cent over the last five years (2003-08), India's growth moderated in 2008-09. But the growth moderation has been much sharper because of the negative impact of the crisis.  

While the impact of the global financial market crisis was less on India in the first two quarters of 2008-09, the full impact of the crisis began to be felt post-Lehman in the third quarter, RBI said.  

The service sector, the prime growth engine of the Indian economy for the last five years, is slowing and with it, the construction, transport and communications, trade, hotels and restaurants sub-sectors.

For the first time in seven years, exports have declined in absolute terms for five months in a row during October 2008-February 2009. Recent data indicate that the demand for bank credit is slackening despite comfortable liquidity in the system.  Dampened demand has dented corporate margins while the uncertainty surrounding the crisis has affected business confidence.  The index of industrial production (IIP) has been nearly stagnant in the last five months (October 2008 to February 2009), of which two months registered negative growth.  Investment demand has also decelerated.  All these indicators suggest that growth will moderate more than what had been expected earlier.
 
Despite the adverse impact as noted above, there are several comforting factors that have helped India weather the crisis.  First, our financial markets, particularly our banks, have continued to function normally.  Second, India's comfortable foreign exchange reserves provide confidence in our ability to manage our balance of payments notwithstanding lower export demand and dampened capital flows.  Third, headline inflation, as measured by the wholesale price index (WPI), has declined sharply. Consumer price inflation too has begun to moderate.  Fourth, because of mandated agricultural lending and social safety-net programmes, rural demand continues to be robust.
 
In order to contain the contagion from the global financial crisis affecting domestic and forex liquidity, the RBI shifted its policy stance from monetary tightening in the first half of 2008-09 to monetary easing. Commercial banks have also reduced their deposit and lending rates in an effort to ease liquidity.

The government launched three fiscal stimulus packages during December 2008-February 2009. These came on top of an already announced expanded safety-net programme for the rural poor, the farm loan waiver package and payout following the Sixth Pay Commission report, all of which too added to stimulating demand.

The reduction in deposit rates was more pronounced in respect of deposits of up to three year maturity while the base prime lending rates (BPLRs) of public sector banks, private sector and five major foreign banks declined between October 2008 and 18 April 2009, RBI said.
 
Most public sector banks have cut BPLRs by as much as 125-200 basis points, followed by 50-150 basis points reduction by most private sector banks and 50 basis points reduction by foreign banks.