Posts tagged D Subbarao
Annual Monetary policy 2010 – Highlights
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
RBI Monetary Policy 2010
Monetary Policy Predictions
Finally the D-day is here..the day when RBI Governor Dr.D Subbarao will announce the monetary policy putting (or rather saying probably putting) an end to the much speculated move of RBI..will it hike the rates, which rate will be hiked and how much..before RBI announces the rates here is MoneyBol’s take on the same…
Inflation
As known to all, inflation is the biggest concern for RBI. In our Inflation WPI March 2010 update a few days back, we saw that the inflation rate, has already crossed RBI’s target of 8.5%, The YoY inflation number of 9.9% for March 2010 is much higher compared to 1.2% observed a year earlier. The food articles have risen 16.65% since March 2009. The manufactured products too have sharply risen by 7.13% since March as compared to 2.29% observed a year earlier. Measures to alleviate pressures from excess liquidity that may exacerbate inflationary concerns have been taken by the Central Bank earlier. Liquidity had been curtailed via a CRR hike of 75 bps in the January Policy.
Mr. C.Rangarajan, Chairman, Prime Minister’s Economic Advisory Council (PMEAC) remarked “The RBI may want to wait for a few weeks to see if food prices will decline on account of the rabi output. Then it might want to tighten liquidity and if inflation still persists, then it will act on policy rates”
Going forward, inflationary concerns are expected to subside slowly with forecasts of normal monsoons, better crop production, good performance of manufacturing sector and lagged effect of monetary policy changes. On the upside risk of rising crude oil prices remain which could trigger inflation again.
Industrial Production
IIP is still growing at double digits and poses good for the economic growth of the country. However in the last month’s release, it seems that IIP seems to be moderating. As stimulus measures are wound up, IIP growth will be mainly driven by domestic demand. Thus in the coming days, IIP may not be able to post the god growth that has been observed post June 2009. A moderation in IIP growth may prevent RBI from taking aggressive measures.
Liquidity
Since the last 75 bps hike in CRR in February, liquidity has come down from the highs of +100,000 cr mark seen in January, but liquidity exists in the system to the extent of Rs 50,000-Rs 60,000 cr. RBI may want to retain some liquidity in the system in order to carry out the G-Sec auctions process smoothly, but on the flip side it will also not like the liquidity to fan inflation. Thus it would like to get rid of some liquidity from the system.
Conclusion
These are some of the most important considerations that will dictate RBI’s decision. A 25 bps hike in all the rates viz Repo, reverse repo and CRR. It is also expected that it may hike the rate by 50 bps. A 25 bps hike in CRR removes about Rs 12,000 cr of liquidity from the system. Considering this, I think that RBI may hike the CRR by 25 bps only and wait for hiking it by another 25 bps for some time. Regarding, repo and reverse repo rates, with RBI’s mid policy hike in March, it has given strong signal of a tightening stance. It will continue with the same. But at the same time, it will not like to derail the growth process by indulging in aggressive rate hikes. A 50 bps hike after the 25 bps hike in March, may pose threat to the nascent growth prospects. Recent developments have given early signals of a moderating inflation, thus RBI may hike the policy rates by 25 bps only instead of 50 bps and prefer to resort to mid policy hike for any further increases in the rates.
Author name: Praveen Bajaj, MBA (SCMHRD)
