The global financial conditions continue to be uncertain and unsettled with ripple effects on domestic money, forex and credit markets. There are indications that the global slowdown is deepening with a larger-than-originally-expected impact on the domestic economy, particularly for the demand conditions in the medium and small industry sector and export-oriented sector. In the context of these developments, further augmentation of the rupee and forex liquidity, strengthening credit delivery mechanisms and improving credit delivery are imperative for sustaining the growth momentum, said the Reserve Bank of India (RBI) while announcing a series of fresh measures last Saturday.

After some major macro measurers like reducing the cash reserve ratio (CRR) by 250 basis points, repo rate by 150 basis points, and statutory liquidity ratio (SLR) by 100 basis points to infuse liquidity (almost over Rs 2 lakh crore) , the RBI has now focused more on micro measures to reduce rates, improving credit delivery mechanism to several priority sectors to arrest the fall in growth.

Clearly, all the swift measures adopted by the RBI in the last 70 days indicate that the central bank would leave no stone unturned to pursue the Indian growth story which stands interrupted by the earlier surge in inflation caused by a lot of factors (primarily by the high oil and commodity prices) beyond the control of the policy makers.

However, the inflationary scenario seems to be changing as the prices of both oil and commodities fell, inflation numbers have moved southwards and are expected to fall further. Way before the expectations of analysts, the headline inflation fell by a huge 174 basis points to the single digit level of 8.98%, as commodity prices eased in the economy. Experts, including the economic advisory council to the Prime Minister, had forecast the inflation would ease to single digits in January 2008.

Before last Friday?s data was released, inflation had stayed above 10% since May 24. Economists said that along with the fall in global commodity prices, contraction of demand in the domestic economy and discounted sale of inventories at the wholesale level cooled the inflation rate.

In his earlier interview with FE, Duvvuri Subbarao, governor, RBI, had explained that the situations that led central bank to unleash tough measures over the last four years to curb the surging inflation, has triggered a change in the stance of the central bank.

What Next?

Enough liquidity has been provided into the system. It is good for the industrial development of the country. The falling interest rates will expedite credit delivery. It is good for the growth of the country?s economy. With inflation coming down, there is a good chance for interest rates to fall further. Said TS Narayanasami, chairman and managing director, Bank of India, ?In case the fall in inflation continues, the RBI may go for further cuts in repo rates as well as CRR. This will result in the releasing of further liquidity into the system. If the current trend continued for some more time, then inflation would be set to come down to 5%-5.5% by the end of the fiscal.?? MD Mallya, CMD, Bank of Baroda, added. ?Inflation was likely to fall and stabilise within the range of 6%-7% by March-end as the prices of oil and food have started coming down.??

The recent measures announced by the RBI have helped to ease liquidity conditions in the domestic financial markets, as is evident from the decline in call rates. Nonetheless, given the sustained FII outflows from the domestic equity markets and the RBI intervention in the forex market through sale of dollars, liquidity is likely to come under pressure once again in the coming weeks. ?We therefore expect a further cut in CRR and repo rate by 50 bps each in the near future, which will lead to further reduction in short-term interest rates,? said Kaushal Sampat, COO, Dun & Bradstreet, India.

The recent cut in the policy rates have reduced the cost of borrowing for banks, which they are likely to pass on to their customers in terms of a lower PLR. This might provide some required impetus to the investment activity and stimulate demand in the long run. Given the increasing downside risks to the growth momentum coupled with the tight liquidity conditions, the RBI will continue to slash rates, said Sampat.

?The main problem as before, is the sudden drying of capital inflow. What is problematic is an abrupt rise in capital flows in good times and the sudden drying of capital flows in bad times. The first case puts pressure on authorities to prevent currency appreciation and second case leads to currency depreciation. In this crisis, the movement from one extreme to the other has been too dramatic and has put the emerging economies and developed economies under severe strain,? observed Amol Agrawal, an economist with IDBI Gilts.

Rohini Malkani, economist, Citi Bank, explained that while softening commodity prices would help margins, private sector asset developers could delay projects as they face expensive funding and poor availability of bank loans. ?We maintain our view that growth in this space will likely to remain weak in the coming months. While the fiscal stimulus implemented earlier in the year (tax exemptions/farm loan waiver/6th Pay Commission recommendations) could help support growth in the near-term, we are cautious about this sector, given that large retailers face falling sales and a growing need to conserve cash,?? she cautioned.

Tushar Poddar, vice-president, Asia economics research, Goldman Sachs, pointed out, ?We are revising down our GDP growth numbers for FY09 to 6.7% from 7.5% and for FY10 to 5.8% from 7.0%. The larger-than-expected shock to the financial sector over the past couple of months, and its knock-on effects on both domestic and external demand are responsible for our lower growth projections. We believe there is little fiscal room for additional stimulus in FY10. We look at the impact on corporate, bank, household and government balance sheets, and negative feedback loops.? The silver lining?a large monetary policy stimulus, prospects of a good agricultural crop supporting rural demand, lower commodity prices, and ongoing infrastructure spending which would limit further downside to growth, he clarified.

Saugata Bhattacharya and Urvi Desai, business and economic research wing, Axis Bank, have analysed the data to show that the interest burden on India Inc rose significantly by 16% quarter-on quarter (Q-o-Q) and 81% year-on-year (Y-o-Y) basis, dragging automobiles, cement, telecom sector, profit-after-tax (PAT) growth to -21%, -21% and -35% respectively for a Y-o-Y basis. Net profits fell by 2.1% Y-o-Y, depressed by losses of oil marketing and media companies. Due to demand destruction and slowdown in global and Indian economies, inventories continue to pile up, the analysis revealed.

Meanwhile, Crisil observed a sharp decline in the disbursement levels of non-banking financial companies (NBFCs) over the past two months, as NBFCs have focused on repaying their maturing short-term obligations to mutual funds (MFs). The decline in disbursements was as high as 70 % in one case, with the average at around 50% for Crisil-rated NBFCs, pointing to the severity of the business shrinkage. Further, the dependence on MFs for short-term funding has been high: CRISIL-rated NBFCs? estimated borrowings from MFs have increased to more than 45% of total borrowing as of September 30 from 30% as on March 31, 2006. Increasingly facing redemption pressures, MFs are no longer lending to the NBFC sector, and are withdrawing their existing exposures as these mature.

However, the recent measures announced by the RBI allowing NBFCs increased access to funding, will indeed ease their debt servicing pressures, but will not address the longer-term issues of business growth. No doubt, the growth in the economy has come under tremendous stress and explains RBI?s swift actions in recent times surprising the analysts. There will be many more surprises in future.

With inputs from Kumud Das & Mahalakshmi Hariharan