Though the recent developments in domestic financial markets render the macroeconomic outlook ''unsettled and uncertain'', the new RBI Governor, in his maiden mid term review of the annual policy statement for 2008-09, said, ''Our financial system is strong and healthy and our economic fundamentals are strong''. ''Once the global situation is managed and calm and confidence restored, the country will return to high growth trajectory,'' he added.
Making no dent to the key rates, which had already undergone certain downward modifications in the recent past to curb liquidity pressure on the banking system, the RBI governor revised downward the apex's bank GDP growth projects for the current fiscal at 7.5 to eight per cent from the eight per cent earlier estimated.
The current challenge, according to him was to strike a balance between preserving financial stability, maintaining price stability, anchoring inflation expectations and sustaining the growth momentum.
He said RBI would resort to both conventional and unconventional tools to manage the situation.
Referring to the liquidity crisis and serious erosion in the capital market since the global financial melt down, he said, ''The equity markets have weaned sporadically on cues from global markets and particularly in Asia. These developments in domestic financial markets render the macroeconomic outlook 'unsettled and uncertain'.''
On the path that RBI needs to follow for the remaining half of the current fiscal, Mr Subbarao said the apex bank would continue with the policy of active demand management of liquidity through appropriate use of all instruments, including the Cash Reserve Ration, Open Market Operations (OMO), the Market Stabilisation scheme and the Liquidity Adjustment Facility, to maintain orderly conditions in the financial market.
Since the global financial turmoil, various measures clamped by the central bank had led to pumping in of around Rs 187,000 crore into the system, he said. ''The RBI would closely and continuously monitor the situation and respond swiftly and effectively to developments, employing both conventional and unconventional measures,'' he added.
RBI would also emphasise credit quality and credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion, he said.
Subbarao terming the current global fiscal situation as the worst, since the great depression, and uncertain and unsettled, said the external pressures were hitting on India on top of the existing domestic pressures posing complex challenges for monetary management.
''This is a uncharted territory with no standard conventional solutions,'' he said adding that the RBI had endeavoured to be proactive and had taken measures to manage the rapid developments and ease pressures stemming from the global crisis.
He said, ''While the financial system in India has so far been reasonably insulated from the carnage in international financial markets, cataclysmic events, including the sheer spread of the turmoil and the type of financial institutions that have plunged under, regardless of reputation or size, warrants an intensified watchfulness with a readiness to act swiftly to cushion the economy and the domestic financial system from external shocks, He said the Indian financial sector was stable and healthy.
Indian banks have been affected only peripherally as they did not have direct financial exposure to the US sub prime assets. Mark to market losses on financial instruments held in the overseas portfolio of foreign branches and foreign subsidiaries of Indian banks are due to the general widening of credit spread.
He said the overall capital adequacy ratio of commercial banks in India was 12.7 per cent, well above the regulatory minimum of nine per cent and the Basel accord requirement of eight per cent. In fact all commercial banks in India have a capital adequacy ratio of above ten per cent, furthermore the regulatory mandate of keeping 25 per cent of net demand and time liabilities as slr and 6.5 per cent as crr, provides an inherent strength to the Indian banks, he said.
The inter bank market in India had been functioning in an orderly manner and transaction volumes in recent weeks have been comparable to those in the previous six months.