RBI hikes interest rates / RBI hikes repo rate by 50 bps, CRR by 25 bps
Sensex sinks 558 points as RBI hikes rates
Challenged by unrelenting inflationary pressures, the Reserve Bank of India on Tuesday announced stringent measures of hiking mandatory cash reserve of the banks and its short-term lending rate to them to suck up an estimated Rs 8,000 crore (Rs 80 billion).
Presenting the first quarter review of the annual statement on Credit and Monetary Policy for the year 2008-09 on Monday, RBI Governor Y V Reddy hiked cash reserve ratio by 0.25 per cent to 8.75 per cent and the short-term lending (repo) rate by 0.50 pre cent to 9.00 per cent.
According to analysts the move could make loans dearer for housing, car and personal expenses as also to the industry.
Highlights
Bank Rate kept unchanged.
Reverse Repo Rate under LAF kept unchanged.
Repo Rate increased by 50 basis points from 8.5 per cent to 9.00 per cent.
Cash Reserve Ratio to be increased by 25 basis points to 9.0 per cent with effect from the fortnight beginning August 30, 2008.
GDP growth projection for 2008-09 revised from the range of 8.0-8.5 per cent to around 8.0 per cent, barring domestic or external shocks.
While the policy actions would aim to bring down the current intolerable level of inflation to a tolerable level of below 5.0 per cent as soon as possible and around 3.0 per cent over the medium-term, at this juncture a realistic policy endeavour would be to bring down inflation from the current level of about 11.0-12.0 per cent to a level close to 7.0 per cent by March 31, 2009.
While there are early signs of some moderation in money supply and deposit growth, they continue to expand above the indicative projections warranting continuous vigilance and appropriate and timely policy responses.
In view of the evolving environment of heightened uncertainty in global markets and the dangers of potential spillovers to domestic markets, liquidity management will continue to receive priority in the hierarchy of policy objectives over the period ahead.
Barring the emergence of any adverse and unexpected developments in various sectors of the economy, assuming that capital flows are effectively managed, and keeping in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in 2008-09 will broadly continue to be:
To ensure a monetary and interest rate environment that accords high priority to price stability, well-anchored inflation expectations and orderly conditions in financial markets while being conducive to continuation of the growth momentum.
To respond swiftly on a continuing basis to the evolving constellation of adverse international developments and to the domestic situation impinging on inflation expectations, financial stability and growth momentum, with both conventional and unconventional measures, as appropriate.
To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion.
Domestic Developments
Real GDP growth in 2007-08 was revised upwards to 9.0 per cent by the Central Statistical Organisation (CSO) in its end-May 2008 estimates from the advance estimates of 8.7 per cent released in February 2008.
Inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, increased to 11.89 per cent as on July 12, 2008 from 7.75 per cent as at end-March 2008 and 4.76 per cent a year ago.
On a year-on-year basis, inflation based on the consumer price index (CPI) for agricultural labourers and rural labourers increased to 8.8 per cent and 8.7 per cent, respectively, in June 2008 from 7.8 per cent and 7.5 per cent a year ago.
Year-on-year inflation based on CPI for industrial workers and urban non-manual employees stood at 7.8 per cent and 6.8 per cent, respectively, in May 2008 as compared with 6.6 per cent and 6.8 per cent a year ago.
The CPI-based inflation measures have increased in the range of 2.0-3.2 percentage points over their levels in January 2008.
The price of the Indian basket of crude oil increased from US $ 99.4 per barrel in March 2008 to US $ 129.8 in June 2008 and further to US $ 141.5 on July 3, 2008 before declining to US $ 121.9 on July 25, 2008.
Money supply (M3) increased by 20.5 per cent on a year-on-year basis on July 4, 2008, lower than 21.8 per cent a year ago.
The year-on-year growth in aggregate deposits of scheduled commercial banks (SCBs) at 21.7 per cent (Rs.5,89,646 crore) up to July 4, 2008 was lower than 24.6 per cent (Rs.5,36,617 crore) a year ago.
Up to July 4, 2008 non-food credit of scheduled commercial banks (SCBs) rose by 25.9 per cent (Rs.4,85,709 crore) on a year-on-year basis, higher than 24.6 per cent (Rs.3,69,109 crore) a year ago.
Public sector oil marketing companies have been provided US $ 4.3 billion (Rs.19,325 crore) against oil bonds purchased under the Special Market Operation (SMO) scheme up to July 25, 2008.
The total overhang of liquidity as reflected in the balances under the LAF, the MSS and the Central Government?s cash balances taken together declined from an average of Rs.2,42,370 crore in April 2008 to Rs.2,12,201 crore in May 2008 and Rs.1,93,726 crore in June 2008 (with an intra-year peak of Rs.2,93,048 crore on April 8, 2008) before declining to Rs.1,45,200 crore on July 25, 2008.
Financial markets reflected the changes in liquidity conditions during the first quarter of 2008-09.
Yields in the Government securities market hardened substantially during the current financial year in both primary and secondary segments.
Deposit rates of SCBs increased, particularly at the longer end of the maturity spectrum, during the first four months of 2008-09 (up to July 25).
The equity markets witnessed a major downturn in both the primary and secondary segments during the current financial year so far, continuing the moderation that had set in by early January 2008.
Commercial banks? holdings of Government and other approved securities was 27.7 per cent of the banking system?s net demand and time liabilities (NDTL) which was marginally lower than 27.8 per cent at end-March 2008 and 28.7 per cent a year ago.
Gross market borrowings of the Central Government through dated securities at Rs.72,000 crore (Rs.73,000 crore a year ago) during 2008-09 so far (up to July 25, 2008), constituted 41.0 per cent of the budget estimates (BE) whereas net market borrowings at Rs.47,982 crore (Rs.45,232 crore a year ago) constituted 48.5 per cent of the BE.
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Bank, realty, auto and capital goods stocks went into a tailspin this afternoon as the Apex bank hiked CRR and Repo rates by 25 and 50 basis points respectively to 9 per cent to control inflation.
The hike in rates and concerns voiced by the central bank of the country about high inflation kept the market deep down in the red right till the end of the session today. There were some good results from India Inc, but then, with global markets also not displaying any strength, participants were in no mood to turn buyers today.
The Sensex, mirroring the sharp fall in prices of front line stocks, ended the day with a massive loss of 557.57 points or 3.89% at 13,791.54. In intra-day trades today, the barometer touched a high of 14,153.12 and a low of 13,727.14.
The National Stock Exchange's 50 stock Nifty index, which swung in a range of nearly 175 points - it hit a high of 4332.20 and a low of 4159.15 today - settled at 4189.85 with a huge loss of 142.25 points or 3.28%.
Reflecting the sharp fall of bank stocks, the Bankex nosedived 8.31% today. The Realty barometer went down by over 5.5%. The Capital Goods index lost 4.92%. The Power and Auto indices eased by over 4%. BSE Oil & Gas (down 3.62%), PSU (down 3.12%), Metal (down 1.91%), HC (down 1.65%), Teck (down 1.59%) and CD (down 1.07%) also closed sharply lower.
The IT index, thanks to the smart rally at a few counters, trimmed down its losses significantly and ended just 0.51% down today. The FMCG index closed with a slender gain. Banking sector heavyweights HDFC Bank (down 8.7%), ICICI Bank (down 8.45%) and State Bank of India (down 6.8%) declined sharply.
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Source: SIfy, Rediff