RBI hikes repo rate by 25 bps

In a stylised mock charge on "inflationary expectations", the RBI on Wednesday marked up the cost of money it lends to banks against securities under repo by 25 basis points to 7.50 per cent. At the same time, it lifted growth projections for the current fiscal to 8.5-9 per cent over its last estimate of 8 per cent. All other key markers were left unchanged by the RBI as a springtime offer to the economy.

To contain "sharp increases in asset prices as well as greater volatility in financial markets", the RBI Governor, Dr Yaga Venugopal Reddy, has raised provisioning on standard assets against loans to the real estate sector, outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans to two per cent from one per cent. Provisioning for loans to housing, agriculture, SMEs and industry remain unchanged.

Banks will have to provide two per cent (existing 0.4 per cent) on exposures in standard assets to non-deposit taking NBFCs while the risk weight goes up to 125 per cent from 100 per cent.

Focus points

At a press conference, the RBI Governor said the focus was on price stability and credit quality. The Deputy Governor, Dr Rakesh Mohan, added RBI would not hesitate to use all policy instruments, including CRR, to manage liquidity. Bankers may wait a while, having chalked up deposit and lending rates in recent months.

The Third Quarter Review of Annual Statement on Monetary Policy for 2006-07 wants to douse "inflationary expectations" by sticking to the 5-5.5 per cent band. If over the last two years, soaring crude prices pushed RBI to make money dear, today there is concern over the uneven farm performance.

Industry and services sector are growing at a hopping pace while agriculture growth "has not been as sanguine" with output dropping in the first half of 2006-07 over that a year ago. Supply-side pressures due to "declines in the production of rice, coarse cereals, oilseeds, pulses and cotton have emerged as a source of concern for the near-term outlook, especially in view of the relatively low levels of food stocks," says the RBI.

Foreign deposits are being discouraged with interest rate ceilings on NRE and FCNR(B) deposits being pruned by 50 and 25 basis points respectively. Also, banks have been prohibited from granting fresh loans in excess of Rs 20 lakh against these deposits.

Task at hand

Yet that leaves RBI with the trying job of ring fencing the impact of dollar inflows with net accretion to forex reserves (excluding valuation changes) being $ 8.6 billion in April-Sept. 2006. Additional liquidity of Rs 13,040 crore was absorbed under the MSS till January 25, 2007 and balances under MSS swelled from Rs 29,000 crore on March 31, 2006 to Rs 42,040 crore as of January 25, 2007. If the RBI does not absorb dollars, the rupee tends to appreciate whereas soaking up the greenback frees rupee funds into the system.

Non-food credit expanded by Rs 4,07,735 crore (31.2 per cent) as on January 5, 2007 on top of a rise of Rs 3,11,013 crore (31.2 per cent) a year ago.

Provisional numbers for October 2006 shows a rise of 33.4 per cent in credit to retail and services sectors, forming 49.2 per cent of total non-food bank credit with the share of retail at 25.9 per cent.

Loans to commercial real estate rose by 83.9 per cent with its share in total non-food bank credit being 2.5 per cent.

Money flows to the farm sector (which has a share of 12.1 per cent in total bank credit) grew by 30.8 per cent by October 2006 while the share of priority sector advances dipped from 36.5 per cent to 35.2 per cent.