In a somewhat more hawkish stance compared to June last, the half-yearly monetary policy review of the Reserve Bank of India has kept the policy rates unchanged. It did not announced any changed in the repo and reverse repo rates. The banks rates have also been kept unchanged at 6%. The CRR is up by 50 basis points to 7.5 %. RBI keeps the GDP forecasts unchanged at 8.5%. The inflation target for FY08 stand at 5%.
Emphasising, on the need to manage capital inflows, the Bank said .surplus liquidity needs to be handled as priority.RBI Governor, Dr YVR Reddy clearly underlined the threat to inflation from external inflows. It further said that the money supply is expanding at 17-17.5%. The policy has taken a special note of the irregularities in banks’ real estate exposure.. Dr Reddy expressed concerns on excessive lending to real estate sector. Some highlights: Gross domestic product growth forecast for 2007-08 maintained at 8.5 per cent, assuming no further escalation in crude oil prices and barring domestic or external shocks.
Inflation target for FY08 maintained at 5.0 per cent while resolving to condition expectations in 4.0-4.5 per cent range, with a medium-term objective of 3.0 per cent. Moderate net capital flows so that money supply is not persistently out of alignment with indicative projection of 17.0-17.5 per cent. Covering of ‘Short-sale’ and ‘When Issued’ transactions to be permitted outside the Negotiated Dealing System – Order Matching system. Non-deposit taking NBFCs to be considered ‘qualified entities’ for accessing the NDS-OM using the constituents’ Subsidiary General Ledger route. Reinstatement of the eligible limits under the past performance route for hedging facility to be permitted.
Oil companies permitted to hedge foreign exchange exposures by using overseas over-the-counter/ exchange traded derivatives up to a maximum of one year forward. Importers and exporters having foreign currency exposures allowed to write covered call and put options in both foreign currency/ rupee and cross currency and receive premia. Deposit rate ahead of the 4.9 lakh crore target for FY08. Currency markets see a tentative return to normalcy. The RBI also withdrew the ceiling of Rs 3,000 crore on daily reverse repo under the LAF from August 6, 2007.
Market Reacts after the policy announcements: Though it is a non-event for the equity markets , the Sensex lost 100 points soon after the policy announcements, while the NSE Nifty traded flat. Bond markets too be negatively impacted by the hike in CRR. Experts speak on RBI’s monetary policy review: : The policy this time is a measure to manage liquidity in the system. The recent reduction in the interest rates by some banks will finally stop and we expect the rates to stay where they are for some more time due to hike in the CRR, Says Chanda Kochar, executive director, ICICI Bank. Expects some easing in retail rates: HDFC Bank.
Highlights/ Key takeaways from RBI's credit Policy announcement:
CRR Hiked To 7.5% By 50 Bps
Repo, Reverse Repo, Bank Rate Rates Left Unchanged
RBI Ready To Take Steps Given Global Uncertainties & Unconventional Policy Responses To Developments
GDP Growth Target Unchanged At 8.5%
Inflation Target Maintained At 5%
Reiterates Resolve To Lower Inflation To 4-4.5%, Going Forward
Medium Target for inflation rate is 3%
Money Supply Target Retained at 17-17.5%
Credit growth has slipped to projected level of 24-25%;
Need to moderate expansionary effects of capital flows so that money supply doesn't exceed target
RBI Retains Option To conduct overnight or Longer term Repos
Biggest Challenge For RBI is excess money supply due of Capital Flows
Inflation Expectations Well-Anchored
Risk To Inflation From Liquidity Infusion By global Central Banks
Risks Inflation Also From Crude and Chinese Demand
Risks to Inflation to Dominate Policy in the Next 12-18 months
Inflation risks From Oil Prices remain Incipient
Asset Prices High, But Some Evidence Of Stable Real Estate Prices
Recent Events in Financial Markets show concern for fincl stability can assume overriding Importance
Agriculture Growing Above Trend, Industry & Services Shows slight slackening
Another Oil Price hike seems Reasonable
Fiscal Consolidation Under Strain on High Interest Payments & Subsidies
Revenue Deficit For Apr-Aug at 123% of estimates vs 94% year ago
H1 Current A/C Deficit Expected to Have Been Contained At Year Ago Level
Non competitive bidding for state loans to be permitted by March 2008
State govts may prepay Power bonds from April 2008 onwards
New system of valuing and issuing floating rate bonds by Mach 2008
Committed to Allowing Repos in Corp Bonds, when safe settlement, DvP is in place
Permits short sale & When Issued Deals Outside of NDS-OM System
Non Deposit Taking NBFCs can access NDS-OM through CSGL Route
Oil Cos Can Hedge 50% of their Inventory using OTC Derivative products
Importers, exporters may write covered call and put options
Importers, Exporters may write in rupee & cross currency and receive premia
Banks permitted to Run Cross Currency Options Books; Subject to RBI Nod
Banks permitted to offer American options
Final Guidelines for Banking Holding Cos to be Issued By End –Nov
Final Guidelines on Credit Default Swaps To Be Issued By End Nov
May Bank Errant Banks from engaging recovery Agents; Ban Likely On Banks against which Court's Have Issued Penalties .....
Other related stories:
RBI move aimed at curbing excess liquidity: FM
CRR hike to absorb Rs 16K cr excess liquidity in system: Y V Reddy
RBI blocks rupee near 9-½ yr peak
RBI hikes CRR to 7.5%; other key rates unchanged
Mkt ends in red amid volatility post new credit policy
How experts review the Credit Policy
CRR hike to discourage slacken interest rates
FM supports RBI move on CRR hike
RBI cautions on high oil, food prices
Brokers`Outlook: Market to open flat tomorrow
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