Third Quarter Review Of Rbi Monetary Policy For 2009

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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 rates under the LAF to their historically low levels, lowering of reserve requirements, institution of sector-specific liquidity facilities and a forex swap facility, relaxation in the ECB guidelines etc. By hiking the SLR to 25% in the 3quarter review of monetary policy, the RBI has probably taken the first step towards reversing the accommodative monetary policy it has maintained till now.

Key highlights of the 3rdquarter review of RBI monetary policy for FY10 are: MONETARY MEASURES Bank 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 fortnight Beginning Nov 07, 2009. STANCE OF MONETARY POLICY

Growth Projection The GDP projection for 2009-10 remained unaltered from that made in the First Quarter Review of July 2009. Assuming a modest decline in agricultural production and a faster recovery in industrial production, projection for GDP growth for FY10 has been retained at 6.0% with an upside bias.

Inflation Projection Projection for WPI inflation at end-March 2010 was placed at 6.5% with an upside bias. This is higher than the 5.0%, projected in the First Quarter Review of July 2009.

Monetary Projection

www.kgandhi.anindia.com The projection of money supply growth of 18.0% set out in July 2009 is revised downwards to 17.0%. Consistent with this, aggregate deposits of scheduled commercial banks are projected 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 is likely to check the flow of credit to the commercial real estate sector as well as increase the cost of funds for commercial real estate players. Stricter NPA normsThe RBI also asked banks to ensure that their total provisioning coverage ratio is not less than 70% and imposed a timeframe of September 2010 to achieve this target.

Expert Views on RBI credit policy review Mutual Funds, Banks, Financial Institutions Arindam Ghosh, CEO, Mirae Asset Mutual We expect CRR to be pulled up first, may be by December. Thereafter, in JanMar, we can expect significant moves. It is difficult to guess the quantum of hikes as it will depend on inflation and liquidity. Bank shares might take a hit in the short-term as there was no hike in the heldto-maturity exposure. Also, real estate might take a hit due to higher provisioning by banks for realty exposure. But, we are positive on the banking sector in the long-term. Manoranjan Sharma, Chief Economist, Canara Bank As most of the banks keep SLR much above 24%, there would not be much of an impact.The central bank could hike banks' Cash Reserve Ratio by 50 basis points in its January policy. Rupa Rege Nitsure, economist, Bank of Baroda RBI's measures will certainly improve the overall soundness of the banking system. 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 in private consumption demand, and bearish investment sentiment among small and medium enterprises. Ravi Ramu, Director, Puravankara Projects Hike in provisioning for real estate sector will ensure credit flows to right projects, and developers with better execution capability. This will bring better discipline in lending as against the situation witnessed in 2006-07. For right projects and developers with sound financials, 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 to happen only when inflation moves out of the tolerance zone. A hike in CRR by January looks probable, while Repo and Reverse Repo rates may be 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 commercial real estate sector. With total provisioning coverage ratio of not less than 70%, retail investors will find it even more difficult to avail new loans. RBI has also increased the provisioning requirement for advances to commercial real estate sector from present 0.4% to 1%, a move which will make lending to the sector even tougher. Such measures will have a negative impact on the real estate sector as banks will have to increase risk provisions. Banks with higher exposure to real estate sector will have to do higher provisioning according to new RBI guidelines. This will impact the balance sheet of the bank for next four quarters. Overall RBI policy seems to have an impact on Banking and real estate sector only and to 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 the banks have maintained a higher SLR than stipulated. It may also look as a positive surprise, 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 stance which 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 a signal 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% to 7.50% at least till December. Q3 results will be closely watched for the cues on economic recovery and by that time we expect that Inflation figures will also project the trend for RBI to take action on liquidity curbing front. Short Term rates in particular are expected to move up. Regards, Kirang Gandhi Corporate fianancial planner www.kgandhi.anindia.com M-9271267305