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Showing posts with label Credit Policy. Show all posts
Showing posts with label Credit Policy. Show all posts
Sunday, October 28, 2007
Interest rate expectations from credit policy
The next review of the credit policy for 2007-08 is expected on October 30. With moderate inflation, the expectations of a decrease in interest rates are high. Interest rates hikes for the past couple of years have put pressure borrowers. Recently, the Finance Minister had asked banks to take a soft line on interest rates. The wholesale price index inflation has come down significantly.
The growth in loans has moderated, and there is a slight rolling over in the economic activity. These are the desired outcomes of the tight monetary policy that the RBI has followed. As of now, the prime lending rate (PLR) of banks varies between 12.75 and 13.5 percent. Inflation is hovering around five percent. Other countries have substantially lower interest rates. China has a negative real interest of 2.64 percent. South Korea's real interest rate is three percent.
Thailand's is 1.45 percent and Malaysia's is 1.72 percent. The rupee's continuing upward march is throwing up problems for exporters. Despite billions of dollar of buying, the central bank is unable to stop the rise of the rupee against the dollar. The RBI's forex reserves are now more than $12 billion. The liquidity arising from forex intervention is being mopped up immediately with MSS bonds. However, the fiscal cost of this is becoming unbearable. Servicing these bonds will add well over Rs 10,000 crores to Government expenditure. The fund flows through the foreign institutional investor (FII) route has continued unabated.
The recent reigning in of the participatory note (PN) route may slow down the funds flow through this route. The surge in capital inflows has prompted the RBI to accelerate the pace of intervention in the foreign exchange market and the consequent scaling up of sterilisation through the market stabilisation scheme (MSS), restrictions on capital inflows through external commercial borrowing (ECB), the restricted use of PNs and liberalisation of capital outflows. Despite aggressive intervention, the rupee has kept appreciating. The issue of liquidity overhang continues to pose a challenge for the RBI in containing inflationary pressures.
All-time high global crude oil prices, global food shortages and the escalating domestic consumer price indices indicate a build-up in inflationary expectations. The enhanced MSS programme is also proving to be inadequate in absorbing excess liquidity meaningfully. The reverse repo auctions continue to attract large amounts of over Rs 300 billion.
The equity markets are demonstrating fair signs of resilience. FII inflows' share in accretion to forex reserves has averaged only 40 percent. So, a hike in the cash reserve ratio (CRR) appears inevitable. The CRR is a blunt and a direct instrument to impound liquidity to contain inflationary pressures largely emanating from higher than desired M3 growth. One alternative is to open the reverse repo window. This will come at a cost for borrowers. The other option is to increase the CRR.
While this could be the preferred solution, it could force up lending rates as banks try to recover the loss of interest on the CRR. While taking a decision on whether to reduce interest rates or not, the RBI will be guided by the inflation situation and expectations. Global crude oil price hikes are going on. Crude has touched nearly $80. It is to be noted that high interest rates are taking a toll on the economy. The corporate sector is already feeling the pinch. There is a strong demand and visible case for reduction in interest rates.
The hard work done to control inflation has started yielding results. The RBI cannot afford to undo these efforts. The primary instrument which may be used to control liquidity in the system would be the CRR. This would draw out excess liquidity from the system. Also, with reduced funds, interest rates may not be brought down by the banks. On the contrary, they may have to stay at the present levels. An increase in interest rates is unlikely.
Monday, April 30, 2007
Friday, April 27, 2007
Wednesday, April 25, 2007
Monetary policy review: Sharekhan Special dated April 24, 2007
Monetary policy review
The Reserve Bank of India (RBI) has kept the key interest rates, like the reverse repo rate, the repo rate and the bank rate, as well as the cash reserve ratio (CRR) unchanged in its Annual Monetary Policy for the year 2007-08. The policy is in line with our expectations. It continues to remain focused on maintaining price stability and anchoring inflation. However the importance of growth is once again visible in the RBI's statements and that is the key positive takeaway from this policy. The salient features of the policy are given below.
- The reverse repo rate and the repo rate have been kept unchanged at 6% and 7.75% respectively.
- The bank rate has been kept unchanged at 6%.
- The CRR has been kept unchanged at 6.5%.
- The risk weightage on residential housing loans has been reduced to 50% from 75% for home loans up to Rs20 lakh.
- The non-resident Indian deposit rate on foreign currency non-resident bank deposits and non-resident (external) rupee account deposits has been reduced by 50 basis points as per expectations. However the apex bank has made capital account outflows more relaxed for all categories, from corporates to individuals.
Tuesday, April 24, 2007
Credit Policy: Industry bodies give thumbs up
Leading industry associations welcomed the annual monetary and credit policy of the Reserve Bank of India (RBI). While initiatives like pre-payment of extra commercial borrowing (ECBs) without prior RBI approvals with a limit of $400 million, enhancing the overseas investment limit for Indian companies from 200 to 300% of their net worth were applauded, the associations felt that there was a need to adjust the recent hike in bank rate, reverse repo rate and repo rate.
The industry chambers have praised RBI for setting realistic target of controlling inflation rate at 4-5% and maintaining Gross Domestic Product (GDP) at 8.5%.
CII
With no upward increase in key rates and announcement that SMEs would be permitted to book forward contracts without underlying exposures or past records of exports and imports through authorized dealers with whom the SMEs have credit facilities, RBI could not have announced a more appropriate monetary policy, R Seshasayee, president, Confederation of Indian Industries (CII) said. CII was particularly appreciative of the measures, which indicate that RBI is keenly following the effect of rupee appreciation on exports.
Commenting on the macroeconomic targets set by the central bank, the forecast of 8.5% GDP growth for 2007-08 was welcomed. In this context, the increase in the target money supply to 17-17.5% is welcome, said Seshasayee. However, CII expressed concern about the compatibility of 4-5% inflation rate with high growth rate trajectory over the medium term, which India needs to aspire for. "We need to move to a system by which a more disaggregated approach is adopted for inflation monitoring and management."
FICCI
Apart form applauding the RBI on targeting controlled inflation rate upto 5 per cent, enhancing the overseas investment limit for Indian companies from 200 to 300 per cent of their net worth and limiting prepayment for ECBs, the Federation of Indian Chambers of Commerce and Industry (FICCI), has stated that his is in line with the recommendations of the Tarapore Committee on Capital Account Convertibility (CAC) and Percy Committee on IFC and clearly shows RBI’s willingness to move towards the CAC in a calibrated manner.
"RBI has finally taken cognizance of the needs of the middle class willing to buy their own homes by reducing risk weightage marginally on loans up to Rs 20 lakh", said Habil Khorakiwala, President, FICCI. The industry chamber hopes that the RBI will not take harsh measures as it had done in the past to hit credit growth, adversely impacting credit growth rate.
ASSOCHAM
Associated Chambers of Commerce and Industry of India (ASSOCHAM) has appreciated RBIs decisions of pre-payment of ECBs without prior RBI approvals with a limit of $ 400 million, increasing capital account transaction from $ 50,000 to $ 10,000 per financial year, and setting up of working group to tackle issues relating to interest rates, derivatives and facilitate the development of interest rate futures markets.
The industry lobby welcomed the realistic GDP target of 8.5% for 2007-08. The emphasis on price stability and aiming to contain the rate of inflation at 5% in the current fiscal, too, is welcoming. However the recent increase in bank rate, reverse repo rate and repo rate that leads to increase in the cost of money and cost of borrowing, are problematic according to the chamber.
PHDCCI
The PHD Chamber of Commerce (PHDCCI) welcomed RBI’s decision of no further change in the bank rate, reverse repo rate, repo rate and CRR. "Once the inflation rate is within manageable limits, RBI should take measures to soften the interest rate structure in the country", said Sanjay Bhatia, president, PHDCCI. The industry chamber also welcomed the overall instance of the monetary policy to maintain appropriate liquidity in the system to meet the legitimate credit requirements consistent with price and financial stability.
Reduction in the risk rate on residential housing loans to individuals for loans upto Rs 20 lakhs and increase in benchmark prime lending rates by 2-2.5% are applaudable decisions of the apex regulatory bank. Measures like flexibility for pre-payment of external commercial borrowing, enhancing the current or capital transaction limit for individuals by $50,000, increasing the limit of overseas investments by mutual funds are steps in the right direction to achieve the goal of full capital account convertibility, stated the chamber.
IACC
The Indo-American Chamber of Commerce (IACC) welcomed RBI's annual monetary and credit policy and said that "the steps contemplated in the policy will adequately address the inflationary pressure without adversely affecting growth impulses on the one hand and hardening of rupee on the other."
No increase in the repo rate, reverse repo rate, and bank rate is a great relief to the industry. However, increase in the scheduled banks can suck liquidity from the system making credit more costly. IACC believes that RBI has rightly reduced the money supply to a manageable level of over 17% which is critical to abate inflation.
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