Credit Policy: RBI hikes CRR by 50 bps to 7%

2007-07-31 12:01:26 Source : Moneycontrol.com

The Reserve Bank Governor Dr Yaga Venugopal Reddy announced a 50 bps hike in the CRR rates, raising it to 7% from 6.5% in his Credit Policy announcement today.

However, the RBI has kept the repo, reverse repo and bank rates unchanged. There hasn't been much change in the monetary policy stance.

There was a general expectation that starting with this policy, lending rates would start heading southward. While deposit rates may come off after this policy, the pace at which interest rates or lending rates were expected to come off, may not be as swift as was originally expected.

Impact on Rates

Deposit rates likely to come down
Lending rates to remain the same

Highlights

Bank rate, Repo, Reverse Repo rates unchanged
CRR hiked by 50 bps to 7%
Rs 3,000 cr daily reverse repo cap withdrawn
FY08 economic growth target unchanged at 8.5%
Medium-term inflation target: 4-4.5%
FY08 inflation target: 5%















The RBI has been a little more hawkish than what the markets expected it to be. The move will effectively take out approximately Rs 15000 crore from the banking system and bring no returns for the banks for that kind of money. In terms of the stance of the RBI, it remains practically unchanged, which means it’s a pretty hawkish stance, pretty cautious, pretty vigilant on inflation.

It has acknowledged that headline inflation has come down, but it’s clearly worried about the kind of impact increased liquidity may have on forthcoming inflation.

The key takeaways from the policy are:
RBI hikes CRR by 50 bps to 7% from 6.5% from Aug 4
RBI keeps all other key rates unchanged
RBI removes Rs 3000 cr reverse cap from Aug 6
GDP forecast for FY08 retained at 8.5%
Has discontinued second auction of the day
Hedge Funds pose significant risks to markets
Financial stability added to monetary stance
Emphasis on price stability, anchored inflation expectation
Uncertainty over supply situation has increased
Inflation pressures seen from liquidity, high credit
Global inflationary pressures stronger than before
Inflation threat from re-emergence of producers' price power
This was the kind of stance that was enunciated on 31st January, continued in the April 24th policy and the wording more or less remains unchanged in today’s policy, with an addition that says that it will also watch out for financial stability in the country.

So, clearly, if it was a hawkish kind of a stance in January, the stance remains unchanged today, and the walk of RBI matches its talk, in as much as it is controlling the amount of cash available with the banks to lend.
It seems that domestic outlook will dominate the RBI policy in the period ahead. While, the domestic outlook continues to be favourable, fiscal deficit is evolving as per the Budget. The risk to inflation expectation is up due to the high oil prices. Global inflationary pressures are stronger than before. The monetary stance spelt out in April has been retained. According to the policy, prospects for FY08 GDP growth appear positive.
On growth, the RBI says that there is really no moderation – there seems to be increased capacity constraints in several industries like cement and even petroleum refining and it also points to the fact that there is perhaps return of pricing power and higher asset prices, all of which could lead to a rise in inflationary expectation