Effect Of Hike In Repo Rate
The RBI has hiked the reverse repo and repo rate by 25 bps each. It has however left CRR, and Bank Rate unchanged.
The RBI once again has gone for what it calls pre-emptive action. It has chosen to hike the reverse repo and the repo rates by 25 basis points because of the imminent dangers to price stability, and also because all growth indictaors are running well above projections.
The RBI in its review says that both domestic and global factors are delicately balanced in terms of growth vis-a vis price stability, with a tilt towards the possibility of identified downside risk materialising in the near term being more likely than before.
RBI has left CRR, and the Bank Rate unchanged. It's GDP growth forecast for FY07 is unchanged at 7.5-8%.
The inflation target for FY07 is unchanged at 5.0-5.5%.
Highlights:
- Reverse Repo Rate increased to 6.0 per cent and Repo Rate to 7.0 per cent.
- Bank Rate and Cash Reserve Ratio kept unchanged.
- GDP growth projection for 2006-07 retained at 7.5-8.0 per cent.
- Containing inflation within 5.0-5.5 per cent for 2006-07 warrants appropriate priority in policy responses.
- Money supply, deposit and credit growth above the indicative projections, warranting caution.
- Appropriate liquidity to be maintained to meet legitimate credit requirements, consistent with price and financial stability.
- Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy in the period ahead will be:
· To ensure a monetary and interest rate environment that enables continuation of the growth momentum while emphasising price stability with a view to anchoring inflation expectations.
· To reinforce the focus on credit quality and financial market conditions to support export and investment demand in the economy for maintaining macroeconomic and, in particular, financial stability.
· To consider measures as appropriate to the evolving global and domestic circumstances impinging on inflation expectations and the growth momentum. - M3 Growth Projected At 15%
- GDP growth of agriculture assumed at 3%
- Companies sales growth and PAT improved in FY07 vs FY06
- Expectations for overall business situation in Q2 FY07 are better than Q1 FY07
- Non Food Credit up 2.6% at Rs 37,749 Cr in July vs 1.8% at Rs 19,948 Cr a year ago
- Non Food credit up 32.9% at Rs 3,71,993 Cr vs a year ago
- FY07 Farm Credit Growth maintained at 3%
- Stance is to focus on Credit Quality
- Retail Lending increased by 74% YoY
- Home Loan growth at 115.5% YoY
- Loans to commercial real estate rose by 101.3%
- Loans to Industry increased by 26% YoY
- Bank lending to agriculture increased by 35% YoY
- Banks reducing own Investment portfolio to meet demand for credit
- M3 growth at 18.8% higher by 13.8% a year ago, higher than RBI projections
- Fuel prices constitute a major risk to headline inflation
- Continue liquidity management via OMO, LAF, MSS, CRR
- Global risks noted in April policy heightened
- Apr-Jun M3, deposit, credit growth above estimates
- Rise in M3, deposit, credit growth warrant caution
- Banks must focus on retail deposit mobilisation
- Current a/c deficit manageable in FY07
- Non-oil imports slackened; export growth robust
- Passthrough of global oil to be higher than expected
