New Delhi: The Reserve Bank of India (RBI) in its annual review of monetary policy hiked the Cash Reserve Ratio (CRR) – the money banks are required to keep with the apex bank – by 25 basis points to 8.25% effective 24 May while keeping the repo, reverse repo and bank rates unchanged.
The move will suck out around Rs9,000 crore out of the banking system and help tame inflation. On its part, the government too has taken several steps to reverse the spurt in prices including tinkering with excise rates on steel and cement and imposing duty on export of rice.
Prime Minister Manmohan Singh has bluntly told the industry that it had societal obligation to assist government in controlling inflation and warned against seeking short term gains.
In the recent review, the central bank has pegged the GDP growth projection for 2008-09 in the range of 8.0- 8.5%. “Going forward, the resolve is to condition policy and perceptions for inflation in the range of 4-4.5% so that an inflation rate of around 3% becomes a medium-term objective,” RBI said in a statement.
The softer-than-expected policy evoked a positive response from India Inc. The equity markets, however, gave a clear thumbs-up to the policy announcements and the benchmark index rose over 350 points by close of trade on 29 April.
Chanda Kochhar, ICICI Bank
“The Annual Monetary Policy review of the RBI brings to the fore a very balanced approach which we believe would be conducive to overall growth of the economy,” said Chanda Kochhar, joint managing director & CFO, ICICI Bank Ltd.
“The policy is a clear indication that the focus of RBI will be on liquidity management while leaving the decision to adjust interest rates to the banking system,” she added.
Rana Kapoor, YES Bank
“Confidence has been shown on domestic factors driving growth. This, amidst global uncertainties hints at the resilience of the domestic economy, while RBI’s reading of the international economy, suggests that it expects there is now much higher probability of a global economic and credit slowdown than was anticipated till recently,” noted Rana Kapoor, managing director & CEO, YES Bank.
Sunil Godhwani, Religare Enterprises
“RBI has surprised the equity market, as the markets were expecting a hike in the policy rate. Despite a series of CRR hikes, liquidity is comfortable, which will drive the growth in the sector, although at a slower rate,” stated Sunil Godhwani, CEO & MD, Religare Enterprises Limited.
Sanjay Dutt, Cushman & Wakefield
The Credit Policy recognizing the slowdown in the housing sector and its potential to slow down further and therefore impacting the real estate sector overall, decided to support the sector. The announcement of the credit limit of housing loans to individuals carrying a risk weightage of 50% enhanced from Rs20 lakh to Rs30 lakh, which is an initiative to address the mid segment demand in the housing sector.
“The banks would now be able to cater to the growing demand in the mid segment by the funding properties which fall in the stipulated category. It is likely that the short term demand for mid segment less than Rs30lakh would strengthen as banks would be more aggressive,” said Sanjay Dutt, joint managing director, Cushman & Wakefield.
“However, the premium segment would not witness any slow down as their demand is driven by HNIs and NRIs. Also, the increased limit on individual housing loans from INR 2.5mn to a maximum of INR 5mn in respect of Tier-II Urban Cooperative Banks, subject to certain conditions would provide fillip to housing sector demand in the tier II cities,” Dutt added.
Sandesh Kirkire, Kotak Mahindra MF
”The RBI move to keep the Repo rate unchanged in the face of severe inflationary pressure reaffirms the fact that the inflation is mainly supply-induced and can be best handled through the fiscal measures. The CRR hike however ensures no liquidity overhang in the system and achieves the policy objective of lower inflation.”
Santosh Kamath CIO - Fixed Income, Franklin Templeton Investments
The central bank has adopted a cautious tone and is looking to strike a balance between containing inflation and maintaining the economic growth. While key interest rates have been left unchanged, we expect the upside to be limited over the near term, as market direction would depend on inflation and liquidity fronts. The rally in gilts could be short-lived given the supply situation – MSS bonds and the fact that government borrowings are front-loaded in the first half of this fiscal year. The movement of the short end of the curve will depend on the liquidity levels once all the CRR hikes come into effect. Corporate spreads are likely to be range bound.