RBI Governor Dr D Subbarao announced the annual monetary policy on Tuesday. RBI seems to have taken a more dovish stance than expected. Many analysts and market participants had expected a 50 bps hike in the policy rates. As expected, RBI took cognizance of the fact that inflation seems to be moderating and has opted to raise rates in steps rather than at one go. Inflation is the primary concern but at the same time it needs to ensure that high policy rates do not become a hindrance for growth. Following are the highlights of the monetary policy. Equity markets along with Government securities bounced back from the falling spree of last few days following the announcement of the policy.

  • CRR hiked by 25 bps; to absorb Rs. 125 billion from the system
  • Benchmark Repo and Reverse Repo rates hiked by 25 bps each to 5.25% and 3.75% respectively
  • SLR and Bank Rate kept unchanged at 25% and 6%, respectively
  • Bank credit growth expectations increased to 20% in fiscal 2011, compared to 17% in fiscal 2010
  • Bank deposit growth expectations increased to 18%, marginally higher than 17% reported in fiscal 2010
  • GDP forecast hiked to 8.0% with a positive bias for fiscal 2010-11 as compared with expected 7.2-7.5% in fiscal 2010
  • Inflation, as mesured by WPI, estimated to moderate to 5.5% by March 2011
  • Policy stance is to support “non-disruptive” growth in demand for credit while anchoring inflation expectations; to maintain an interest rate regime consistent with price, output and financial stability
  • Banks‟ investments in Non-SLR Bonds of infrastructure companies with residual maturity of more than 7 years allowed to be classified under HTM category
  • Provisioning requirement for sub-standard unsecured infrastructure exposures reduced to 15% from 20%
  • Scheduled Commercial Banks (SCBs) and Non Bank Finance Companies(NBFCs) with networth more than Rs. 10 billion to migrate to IFRS converged Accounting Standards by April 2013
  • Discussion paper on mode of presence of foreign banks by September 2010
  • Discussion paper on guidelines for new bank to be placed
  • Differential regulatory treatment for Core Investment Companies with asset size of over Rs. 1 billion

 Click here to read our projections of the monetary policy.

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