RBI Credit policy

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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