The Reserve Bank of India, in its Macro Economic report today said that the policy stance on price stability was well anchored and signs of moderation in inflationary pressures and a decline in food and fuel prices were in evidence, as well as augmentation of downward risks to growth from the intensification of global financial market crisis.

On the financial services sector, RBI said, global financial market conditions deteriorated substantially during July-October 2008. Bankruptcy / sell-out / restructuring became more widespread emanating from mortgage lending institutions to systemically important financial institutions and further to commercial banks.

The failure of (global) banks and financial institutions also broadened geographically from the US to many European countries. As a result, funding pressures in the inter-bank money market persisted, equity markets weakened further and counterpart credit risk increased. Central banks continued to take action independently and also in a coordinated manner to enhance the effectiveness of their liquidity facilities.

It said emerging market economies (EMEs), which had been relatively resilient in the initial phase of the financial turbulence, witnessed a changed environment in recent months, reflecting tightened liquidity conditions and rising risk.

''The financial crisis seems to be spreading across markets and countries. There has been a breakdown of trust in inter-bank and institutional lending.'' The RBI sees the need to revisit the roles of banks and regulators with respect to financial stability and feels the combination of liquidity tools have cushioned the impact of international turbulence. It added that bank credit to commercial sector remained above the RBI estimation of 20 per cent.'' It said that central banks should play a central role in maintaining financial stability and said it required co-operation among central banks on maintaining financial stability.

The RBI said that higher input costs would affect corporate profit margin during the July-December 2008. It added that too much of stringent regulation might stifle innovation. ''The Q1 growth moderation reflects a cyclical downturn. Structural growth drivers continue to be favourable. The full resolution of the international crisis will take time.''

India's balance of payments position during the first quarter of 2008-09 (April-June) reflected a widening of the current account deficit and moderation in capital flows. The merchandise trade deficit, on balance of payments basis, increased from $20.7 billion in April-June 2007 to $31.6 billion in April-June 2008.

Net surplus under invisibles remained buoyant, led by increase

RBI said it was closely monitoring developments in global and domestic financial markets and said it would take pre-emptive actions to contain volatility in the markets. It said the financial meltdown indicates that market competition does not work and feels the overall size of financial sector may shrink in many markets.

(See: Macroeconomic and Monetary Developments Mid-Term Review 2008-09)