RBI keeps key rates unchanged

In the annual credit policy for the year 2007-08 announced here today, the Reserve Bank has left the CRR, repo and reverse repo rates unchanged.

Announcing the policy here, RBI Governor Y.V. Reddy said the RBI has kept the bank rate unchanged at 6 per cent, the reverse repo rate at 6 per cent, repo rate at 7.75 per cent and the cash reserve ratio (CRR) at 6.5 per cent.

The RBI has now permitted Indian banks to extend credit and non-credit facilities to step-down subsidiaries within the existing prudential limits and some additional safeguards. Banks and primary dealers have also been permitted to begin transactions in single-entity credit default swaps.

The RBI also introduced measures to make interest rates attractive for housing loans upto Rs 20 lakh. Reddy announced today that risk weight on the residential housing loans to individuals would be reduced to 50 per cent from 75 per cent as a temporary measure, keeping in view the default experience and other relevant factors.

This step would be applicable to loans up to Rs 20 lakh and will be reviewed after one year, the policy said. This measure will leave banks with more money to lend for the housing sector and make interest rates attractive for loans up to Rs 20 lakh.

Meanwhile the apex bank has lowered its growth forecast to 8.5 per cent from 8.5-9 per cent as it expects global GDP to decline in 2007.

Inflation targets have also been revised downward to 5 per cent from last year’s targets of 5-5.5 per cent. The RBI hopes to rein in inflation between 4 and 4.5 per cent over the medium term.

With foreign exchange inflows peaking $200 billion, the RBI has begun to move a bit further towards full capital account convertibility.

Among the measures in this direction include permission for Indian companies to invest in foreign companies upto 300 per cent of their net worth, hedging for individuals and outward remittances up to $ 100,000 as against $50,000 in the past.

Domestic producers and users will also be allowed to hedge their price risk on international commodity exchanges for copper, aluminia, zinc, and even aviation turbine fuel. Indian companies will also be allowed to rebook and cancel their forward contracts.

The RBI has also reduced interest rate ceilings on non-resident deposits. It proposed allowing corporates to repay more external commercial borrowings ahead of schedule, proposed increasing the aggregate ceiling for overseas investment by mutual funds to $4 billion from $3 billion, and increased the foreign portfolio investment limit for listed firms.

Reddy also put out a roadmap for the apex bank to develop the corporate bond market, futures contract, establishment of credit information companies and a number of steps to help distressed farmers and micro-finance.

Reddy announced that a credit guarantee scheme would be introduced for distressed farmers.

Markets party

The financial market gave a thumbs up to the annual credit policy, which pushed up the benchmark Sensex higher by over 225 points and lifted rupee to over a nine-year high.

The RBI’s annual monetary and credit policy, which left all key rates unchanged, boosted trading sentiment in stocks, forex and bond markets at 1230 hrs and triggered all-round buying.

While the BSE Sensex zoomed by over 225 points to 14,153.58, the rupee surged by 51 paisa against the US dollar which traded at Rs 41.17.

The government bonds rose, pushing 10-year yields down to the lowest this month. Bonds rallied and the yield on the benchmark 8.07 per cent bond due for 2017 fell 4 basis points, or 0.04 percentage points, to 8.03 per cent.

On the stock market, the major contribution to the rise in the Sensex came in from Bank index, which shot up by 313.41 points, or 4.55 per cent at 7,195.25 points. Most of banking stocks were up between the range of 3 and 7 per cent across the board.

Bankers gung ho

Bankers were optimistic about the Reserve Bank’s annual credit policy, which left all key rates unchanged, but feared that there could be tightening measures in the near future if it had to contain inflation around 5 per cent.

There is substantial liquidity in the market, evident from the fact that the money supply was dangerously high at 20.8 per cent and any containment will require some drastic belt-tightening.

K.V. Kamath, managing director of ICICI Bank, which accounts for a sizeable percentage of home loans, fears further tightening as the apex bank tries to achieve the medium term inflation target of 4 to 4.5 per cent. J&K Bank chairman and chief executive Haseeb A. Drabu said that between the lines it was a strong monetary policy and there could be further tightening in the next few months."

Public sector banks, however, welcomed the cut in risk provisioning as it would improve their margins with about 80 per cent of their home loans being sub-Rs 10 lakh.

Source: Tribuneindia.com