Once again, Dr. Y.V. Reddy, the Governor of the Reserve Bank of India (RBI) surprised the market by hiking only the repo rate, its key lending rate, and leaving the reverse repo rate, at which it borrows from banks, unchanged. The central bank increased the repo rate by 25 basis points to 7.25%, but kept the reverse repo rate at 6%. The bank rate and CRR were also left unchanged at 6% and 5%, respectively. The bond market had not anticipated any rate hike at all. Bond prices, which had been volatile prior to the policy announcement fell amid hawkish statements from the RBI Governor. Prices remained under pressure amid concerns that the RBI could go for another rate hike before its scheduled January meeting. Those fears got compounded with Friday's release of Government report on inflation, which accelerated to a new four-month high. Finance Minister P. Chidambaram said inflation control was the most important goal for the Government. He also said that the Centre would take necessary steps to check spiraling prices. Reacting to the latest inflation data, Dr. Reddy said that the central bank would not revisit its monetary stance. "This is included in the basic premises of the policy," he said.
Clearly, the RBI and the Government are worried about the run-away growth in credit amid a fast expanding economy. Of particular concern to them is the surging demand for loans from sectors such as real estate, housing loans and consumer loans. Non-food credit grew by 30.5% as at Oct 13, 2006 on top of an increase of 31.8% a year ago. Year on year growth in money supply (M3) was higher at 19% versus 16.8% a year ago. So, to arrest the soaring demand for credit, especially in sectors that are appearing to be showing signs of overheating, the central bank has made borrowing more costly for banks. What the RBI and the Government want is that banks should rebalance their portfolio by leaning less towards real estate and retail loans. The central bank is indicating that loans from it would be much more expensive compared to the market rate. Dr. Reddy has also hinted that if the loan growth continues at the current pace, there could even be some liquidity crunch as the economy enters the busy season. In a nutshell, the RBI is telling banks to pull up their socks and be more prudent in lending. Otherwise, they will have to resort to the central bank for borrowings, which will come at a higher rate.
Govt gets serious about infrastructure
The Government seems to be bent on removing the biggest bugbear of the Indian economy, the infrastructure. This week, it approved a slew of projects in the power and road sector that underlines its commitment to improving the tardy infrastructure. The Cabinet Committee on Economic Affairs (CCEA) approved the waiving of the Rs10bn ceiling for equity investment by NTPC Ltd. to establish Joint Ventures and wholly owned subsidiaries in India or abroad for participating in the ultra mega projects. This will be subject to the implementation of maximum two projects. However, the CCEA retained the ceiling of 15% of the net worth of NTPC in one project and the overall ceiling of 30% of the net worth of NTPC in all such projects put together. This will facilitate participation of Joint Venture of NTPC and BHEL in the bidding for ultra mega power projects and result in technically and commercially optimum bid as well as facilitate tying up with world class mining operators, Finance Minister P. Chidambaram told reporters after a CCEA meeting.
The Government also cleared the proposal by AES Corp. of USA to set up a coal-based power plant in Chhattisgarh at an investment of US$1.22bn. The CCEA gave its approval to AES OPGC Holding Mauritius for setting up a wholly owned subsidiary to undertake a green field coal based power generation plant and to undertake coal mining for captive consumption. AES expects to bring in US$ 370mn as FDI while the balance US$ 852mn would be raised through loan from domestic and/or International banks and Financial Institutions. The CCEA approved a plan to undertake construction of 1000 km of expressways under Phase VI of the National Highway Development Programme (NHDP). The projects would cost Rs166.8bn. While the private sector will contribute Rs90bn the balance Rs76.8bn will be provided by the Government as viability gap funding. The expressways would be built through Public Private Partnership (PPP) on Build, Operate and Transfer (BOT) basis. The projects are likely to be completed by December 2015.
Thanks Dhruv