RBI Credit Policy

RBI Policy: FY10 GDP growth projected at 6.0%; cuts Repo, Reverse Repo by 25 bps each; keeps CRR unchanged   

In a credit policy announced by the RBI, FY10 GDP growth has been projected at 6.0%. RBI kept CRR unchanged at 5% and has cut the Repo rate by 25 bps at 4.75% and Reverse Repo rate by 25 bps at 3.25%.

Key measures:

RBI cuts Repo Rate by 25 bps to 4.75%, effective immediately. While Reverse Repo Rate has also been cut by 25 bps to 3.25% with immediate effect. However, CRR has been kept unchanged at 5.0%.

The accounting method of savings bank interest rate will be changed from April 2010. Interest payment on savings bank accounts will be calculated on daily product basis. Working group will suggest the changes for BPLR system and will submit the report by end-August.

Exchange traded rate futures contract will be launched soon. RBI extends special refinance facility to banks till March 2010. Special 14-day repo facility will be extended to banks till March 2010. RBI will conduct special 14-day term repo weekly basis. The central bank will announce first quarter review of monetary policy on July 28.

RBI’s stance:
 
FY10 GDP growth projected at 6.0%. FY10 inflation projected at 4.0% by end March. FY10 credit growth projected at 20.0%. FY10 deposit growth projected at 18.0%. Banks with strong deposit base should aim loan growth over 20%. FY10 money supply growth projected at 17.0%. Deposit, loan rate higher vs 2004-07 but policy rates lower. Ensuring conducive rate condition key policy challenge. To ensure policy regime conducive to credit growth, quality. To maintain rate regime conducive to financial, price stability. Will continue to maintain vigil on global, local development. Steps taken since September aimed to mitigate global crisis impact. Stance conditioned to halt growth fall, keep financial stability. Will maintain conditions conducive for financial stability. Policy thrust to maintain adequate rupee, dollar liquidity. Policy thrust to also maintain market conducive to loan growth. External finance conditions to remain tight. Committed to provide ample liquidity on continuous basis. Global economic outlook remains uncertain and unsettled. Need to address several immediate challenges facing economy. Meeting industry credit needs second policy challenge. Loan growth fall reflects demand fall, inventory drawdown.

Inflation:

RBI said that the inflation risks have “clearly abated”. WPI inflation is seen negative for short period. All inflation indices will be seen to anchor expectations. Endeavour to anchor inflation, inflation expectation.

Government borrowing:

RBI has managed the government market borrowing for FY09 in orderly manner. RBI feles that to manage the government market borrow in non-disruptive way is a major challenge. Large government borrow “militates” against low rate environment. RBI will use policy plus debt management tools to manage governmnet borrowing. H1 OMO buy, MSS unwind equals 3 percentage points CRR cut. RBI has planned OMO buy, MSS unwind H1 FY10 to add Rs 1.20 trillion liquidity. The challenge is to unwind the fiscal stimulus and return to consolidation.

Liquidity:

RBI feels that there is a need to withdraw liquidity once economy regains momentum. The fall in rates across tenures and markets are not uniform. The steps since September boosted liquidity to Rs 4.22 trillion. The liquidity situation has improved “significantly”. Overnight rates have softened “considerably”. MFs’ liquidity problems have eased considerably. Multiple policy, prudential tools aided liquidity management.

Growth:

RBI feels that an upturn in growth momentum FY10 is unlikely as global demand is down. India’s growth prospects remain favourable vs other economies. Supporting drivers of demand is a major policy challenge. .

Market development:

Exchange traded rate futures contract will be based on 10-year G-sec. Structure for pricing floating rate bonds as been revised. Earlier, FRB pricing was linked to 364-day T-bill cut-off yields. FRB auction will be conducted on price-based method vs spread-based earlier. FRB base yield will be linked to 182-day T-bill cut-offs at auctions. Revised issuance structure has been built into NDS-OM auction format. New FRB issuance will be in terms of revised issuance structure. CCIL is developing the revised issuance structure of FRBs. RBI has set up a panel for no bidding in physical form in G-sec auction. One consolidated bid by PDs/banks in gilt auction in non-competitive bidding. Consolidated non-competitive bid will be implemented post notification change. Central government WMA limit has been set at Rs 200 billion in first half 2009-10 while for second half, it has been set at Rs 100 billion. State WMA limit has been set at Rs 99.25 billion for FY10.

RBI will launch STRIPS in FY10. It will place draft norms on STRIPS process by end-May. It will issue revised norms on repo accounting on basis of RBI draft norms. Revised repo accounting norms will be implemented from April 2010. Multi nodal settlement system facility has been extended to insurance, pension funds. Multi nodal system was for MFs to participate in gilt tenders. There were 13 members participating in non-guaranteed OTC trades in rate derivatives. The RBI will OK the clearing houses to have transitory pooling acct with RBI in corp bonds. Transitory pooling account with RBI will help the real time settlement of corporate bonds. RBI also extended ECB relaxation for all-in-cost limit to December. It has relaxed the FCCB buyback policy for the companies. .

Banking:

RBI said that the BPLR has lost relevance as most loans are below BPLR. Sub-BPLR loan system makes loan pricing “non-transparent”. RBI will identify with SEBI macro-prudential concerns of MFs. It will review the export credit refinance limit in March 2010. The limit on loans to NRI against deposits has been hiked to Rs 10 million vs Rs 0.2 million.

RBI said that the banks should not be “overly apprehensive” over small savings. Banks deposits, small savings are no prefect substitute. It will ask the MSE advisory panel to review Credit Guarantee Scheme. RBI allows the banks to set up offsite ATMs without prior nod. RBI will also form a group for better branch authorisation policy.

RBI feels that there are uncertainties about financial strength exits among global banks. Current norm of foreign banks presence in India stays. Foreign banks presence in India norm will be reviewed later. RBI will issue norms on banks’ floating provisions later. It feels that the banks need to integrate forex assets and liabilities in branches.

RBI will form a draft norm on integrating liquidity risk management of banks. It will draft norm on integrating liquidity risk management by June 15. It feels that the banks have been slow in rate cuts as deposit cost is high. It also feels that there is room for more deposit rate cuts. It changes risk exposure to counterparty contracts. RBI will defer the 12% CAR implementation of some NBFCs to March 31, 2010. It will defer the 15% CAR implementation of some NBFCs to March 31, 2011. RBI will issue a paper on banks floating, managing private capital pool by September.

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