Third Quarter Review of RBI Monetary Policy for 2009

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www.kgandhi.anindia.com Third Quarter Review of RBI Monetary Policy for 2009-10 RBI’s 3quarter monetary policy review was on expected lines in the sense that none of the key policy rates were changed as expected by the market. Since mid - September 2008, the RBI provided ample liquidity and maintained a market environment conducive for the continued flow of credit to productive sectors at lower cost. The important measures initiated since mid-September 2008 included reduction of the policy rate
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  www.kgandhi.anindia.com Third Quarter Review of RBI Monetary Policy for 2009-10 RBI’s 3quarter monetary policy review was on expected lines in the sense that none of the key policy rates were changed as expected by the market. Since mid - September2008, the RBI provided ample liquidity and maintained a market environment conducivefor the continued flow of credit to productive sectors at lower cost. The importantmeasures initiated since mid-September 2008 included reduction of the policy ratesunder the LAF to their historically low levels, lowering of reserve requirements,institution of sector-specific liquidity facilities and a forex swap facility, relaxation in theECB guidelines etc. By hiking the SLR to 25% in the 3quarter review of monetarypolicy, the RBI has probably taken the first step towards reversing the accommodativemonetary policy it has maintained till now. Key highlights of the 3 rd quarter review of RBI monetary policy for FY10 are: MONETARY MEASURESBank Rate unchanged at 6.0%.Repo Rate unchanged at 4.75%.Reverse Repo Rate unchanged at 3.25%.Cash Reserve Ratio unchanged at 5.0%.Statutory Liquidity Ratio restored to 25% from 24%, with effect from the fortnightBeginning Nov 07, 2009.STANCE OF MONETARY POLICY Growth Projection The GDP projection for 2009-10 remained unaltered from that made in the FirstQuarter Review of July 2009.Assuming a modest decline in agricultural production and a faster recovery inindustrial production, projection for GDP growth for FY10 has been retained at6.0% with an upside bias. Inflation Projection Projection for WPI inflation at end-March 2010 was placed at 6.5% with an upsidebias. This is higher than the 5.0%, projected in the First Quarter Review of July2009. Monetary Projection  www.kgandhi.anindia.com The projection of money supply growth of 18.0% set out in July 2009 is reviseddownwards to 17.0%.Consistent with this, aggregate deposits of scheduled commercial banks areprojected to grow by 18.0%.The growth in non-food credit is also revised downwards to 18.0% from 20.0%set out in the Annual Policy Statement and the First Quarter Review. REGULATORY MEASURES FOR COMMERCIAL BANKS Provisioning for Commercial Real Estate Loans hiked from 0.4% to 1%Provisioning requirement for advances to the commercial real estate sector classified as‘standard assets’ has been increased from the present level of 0.40% to 1%. This islikely to check the flow of credit to the commercial real estate sector as well as increasethe cost of funds for commercial real estate players.Stricter NPA normsThe RBI also asked banks to ensure that their total provisioning coverageratio is not less than 70% and imposed a timeframe of September 2010 to achieve this target. Expert Views on RBI credit policy reviewMutual Funds, Banks, Financial Institutions Arindam Ghosh, CEO, Mirae Asset Mutual We expect CRR to be pulled up first, may be by December. Thereafter, in Jan-Mar, we can expect significant moves. It is difficult to guess the quantum of hikesas it will depend on inflation and liquidity.Bank shares might take a hit in the short-term as there was no hike in the held-to-maturity exposure. Also, real estate might take a hit due to higher provisioningby banks for realty exposure. But, we are positive on the banking sector in thelong-term. Manoranjan Sharma, Chief Economist, Canara Bank As most of the banks keep SLR much above 24%, there would not be much of animpact.The central bank could hike banks' Cash Reserve Ratio by 50 basis points in itsJanuary policy. Rupa Rege Nitsure, economist, Bank of Baroda RBI's measures will certainly improve the overall soundness of the bankingsystem. RBI is preparing the banking sector for a possible tightening in the near  www.kgandhi.anindia.com future.RBI has realistically factored in concerns of strains in exports, slowdown inprivate consumption demand, and bearish investment sentiment among smalland medium enterprises. Ravi Ramu, Director, Puravankara Projects Hike in provisioning for real estate sector will ensure credit flows to right projects, anddevelopers with better execution capability. This will bring better discipline in lending asagainst the situation witnessed in 2006-07. For right projects and developers with soundfinancials, borrowings will not be expensive despite this hike in provisioning to 1.0% from 0.4%earlier. Anubhuti Sahay, Economist, Standard Chartered Bank  Inflation remains RBI's key concern. Any hike in key policy rates is likely tohappen only when inflation moves out of the tolerance zone.A hike in CRR by January looks probable, while Repo and Reverse Repo rates maybe hiked only in RBI's policy review in April. OUTLOOK FOR EQUITY MARKET   RBI has tightened the new norms related to the provisioning for advances to commercialreal estate sector. With total provisioning coverage ratio of not less than 70%, retailinvestors will find it even more difficult to avail new loans. RBI has also increased theprovisioning requirement for advances to commercial real estate sector from present0.4% to 1%, a move which will make lending to the sector even tougher. Such measureswill have a negative impact on the real estate sector as banks will have to increase riskprovisions.Banks with higher exposure to real estate sector will have to do higher provisioningaccording to new RBI guidelines. This will impact the balance sheet of the bank for nextfour quarters.Overall RBI policy seems to have an impact on Banking and real estate sector only andto a certain extent on the metals sector. OUTLOOK FOR DEBT MARKET The increase in SLR may not have much impact on the G-Sec volumes as almost all thebanks have maintained a higher SLR than stipulated. It may also look as a positivesurprise, since it may lend some support to Government borrowing program with  www.kgandhi.anindia.com increase in volumes in the G-Sec market.By hiking SLR, RBI has marked the beginning of the end of its accommodative stancewhich it had adopted in the wake of the last years global turmoil.By not tinkering with key rates like CRR, Reverse Repo and Repo Rate, RBI has given asignal that it understands the fact that the Indian economy is at its nascent stage of recovery and will wait for further positivegards,signals and will watch inflation figures closely,before going for Rate hikes.We expect the 10 year G-Sec benchmark yield to trade in the wide range of 7.00% to7.50% at least till December. Q3 results will be closely watched for the cues oneconomic recovery and by that time we expect that Inflation figures will also project thetrend for RBI to take action on liquidity curbing front.Short Term rates in particular are expected to move up.Regards,Kirang GandhiCorporate fianancial plannerwww.kgandhi.anindia.com M-9271267305
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