The Reserve Bank of India (RBI) brass met today to take stock of the global financial situation in the wake of the US credit rating downgrade and the possible implications for India.
According to sources, the RBI will closely monitor global developments, and try to maintain orderly conditions in domestic financial markets. The central bank is expected to issue a statement before the markets open on Monday to ensure the participants avoid a knee-jerk reaction. It will also ensure that liquidity does not become a problem for Indian banks.
Among the factors to be closely monitored were crude oil and commodity prices, economists said. A fall in these prices, which economists regard as highly probable, is likely to decide the central bank’s policy stance. It has already raised the policy rate 11 times in 16 months.
“Only if the fall in commodity prices sustains may the central bank reassess its monetary policy stance,” said Samiran Chakraborty, regional head of research, Standard Chartered Bank.
Expectations of a decline in US consumption and a weaker dollar have already put pressure on crude oil prices. From nearly $125 a barrel at the start of the Libyan crisis earlier this year, Brent crude has slipped 13 per cent. India imports over 80 per cent of its annual crude oil requirement.
Economists have also said the RBI should wait and watch for a while before outlining its policy stance.
“The move (the US downgrade) may rattle the markets globally and domestically after the opening on Monday but after the dust settles over the next few days, I do not see too much of a destabilising effect. So far as the RBI is concerned, I think they will like to be in wait and watch mode for some time. I do not see any big credit squeeze happening in the domestic market,” said Siddhartha Sanyal, chief economist, India, Barclays Capital.