Third Quarter Review of Monetary Policy 2009-10: Press Statement by Dr. D. Subbarao, Governor

"This morning, I had a meeting with the chiefs of major banks where we released and disseminated the Third Quarter Review of RBI's monetary policy. First a few words on the response of the banks before I give an overview of the macroeconomic situation and the Reserve Bank's policy stance.

Banks generally welcomed the Reserve Bank's policy stance. They indicated that the monetary measures announced by the Reserve Bank may not put immediate pressure on lending rates. Apart from monetary policy, discussions centred around specific issues such as (i) credit growth and monetary transmission; (ii) government market borrowing programme;(iii) infrastructure financing; and (iv) financial inclusion. Banks felt that credit growth prospects remain favourable going forward. They emphasised the need to expand their capital to sustain their lending operations in future. Banks indicated that they have reduced their lending rates responding to earlier monetary easing by the Reserve Bank. Consequently, their net interest margins have come under pressure. Non-performing assets (NPAs) are expected to increase, particularly from the restructured assets. They felt that if the government borrowings next year are large, they could put pressure on resources and interest rates as credit is expected to pick up significantly. Banks were concerned about their growing exposure to the infrastructure sector and suggested that policy intervention is required from the Government and the Reserve Bank to address the issue of the asset-liability mismatch and exposure in their balance sheets. Finally, banks assured the Reserve Bank that they share its commitment to financial inclusion and indicated that they are working on expanding banking facilities in unbanked areas.

Global Economy

The global economy is showing increasing signs of stabilisation with the Asian region experiencing a relatively stronger rebound. Global economic performance improved during the third and fourth quarters of 2009, prompting the IMF to reduce the projected rate of economic contraction in 2009 from 1.1 per cent made in October 2009 to 0.8 per cent in January 2010. The IMF has also revised the projection of global growth for 2010 to 3.9 per cent, up from 3.1 per cent. However, significant risks remain: (i) the recovery is driven largely by government spending in many economies; (ii) commodity and asset prices have risen aided by high levels of global liquidity; and (iii) emerging market economies (EMEs), which are generally recovering faster than advanced economies, are likely to face increased inflationary pressures.

Indian Economy

Growth