Second Quarter Review of Monetary Policy 2009-10

Reserve Bank of India (RBI) governor Mr. D. Subbarao unveiled the Second Quarter Review of Monetary Policy for FY10. The Apex Bank has left all the key rates and the GDP growth rate target of 6.0 percent for the 2009-10 fiscal unchanged with an upward bias. It has, however, revised the inflation estimate for the current fiscal to 6.5 percent from 5.0 percent projected earlier. It has also hiked the Statutory Liquidity Ratio (SLR), the portion of deposits that banks are required to keep in government securities, from 24.0 percent to 25.0 percent of their Net Demand and Time Liabilities (NDTL) with effect from the fortnight beginning Nov 07, 2009. The Cash Reserve Ratio (CRR), the Repo rate as well as the Reverse Repo rate will stay at their current levels for the next three months. The Reserve Bank of India left its lending rate untouched at 4.75 percent, the lowest in nine years, and its reverse repo rate, at which it absorbs surplus cash from the banking system, unchanged at 3.25 percent. It has also kept cash reserve ratio, the amount of funds banks have to keep on deposit with it, unchanged at 5.0 percent.

Key Highlights of the policy

• Repo Rate: The repo rate under the Liquidity Adjustment Facility (LAF) has been retained unchanged at 4.75 percent
• Reverse Repo Rate: The reverse repo rate is also kept unchanged at 3.25 percent
• Cash Reserve Ratio (CRR): The RBI kept the CRR unchanged at 5.0 percent
• Statutory Liquidity Ratio (SLR): The SLR has been raised by 100 basis points from 24.0 percent to 25.0 percent
• Bank Rate: It kept the bank rate unchanged at 6.0 percent
• GDP Growth: The estimate for FY10 GDP growth was left unchanged at 6.0 percent with an upward bias
• Inflation: Inflation estimate increased to 6.5 percent for the current fiscal with an upward bias, revised from its earlier target of 5.0 percent
• Money Supply, Deposit and Credit Growth: The indicative projection of money supply growth of 18.0 percent set out in July 2009 for the current fiscal, revised downwards to 17.0 percent. Added to this, aggregate deposits of scheduled commercial banks are projected to grow by 18.0 percent for the same period. The growth in adjusted non-food credit, including investment in bonds/debentures/shares of public sector undertakings and private corporate sector and CPs, is also revised downwards to 18.0 per cent from 20.0 per cent set out in the Annual Policy Statement and the First Quarter Review

Analysis of Key Highlights

SLR increased by 100 basis points – The Central Bank has kept all the key rates i.e. CRR, Repo rate and Reverse Repo rate unchanged for the next three months. However, SLR has been raised by 100 basis points from 24.0 percent to 25.0 percent of NDTL with effect from the fortnight beginning Nov. 7, 2009. Added to this, the Central Bank has also said that the liabilities of scheduled banks arising from transactions in Collateralized Borrowing and Lending Obligation (CBLO) with Clearing Corporation of India Ltd. (CCIL) will be subject to maintenance of CRR with effect from the fortnight beginning November 21, 2009. Since September last year, RBI, in a slew of measures to inject liquidity into the economy, has brought down the CRR from 9.0 percent to 5.0 percent, the Repo rate is slashed from 9.0 percent to 5.0 percent and Reverse Repo rate from 6.0 percent to 3.5 percent. Several measures taken by the Reserve Bank since mid-September 2008 have augmented actual/potential liquidity in the system on the aggregate by INR5,85,000 crs.

Inflation estimates increased to 6.5 percent from 5.0 percent for the current fiscal – The Central Bank has increased WPI inflation projection to 6.5 percent with upside bias by end March 2010 from 5.0 percent earlier. Inflation, as measured by year-on-year variations in the wholesale price index (WPI), which remained negative during June-August 2009 due to the base effect, returned to positive territory in September 2009. WPI inflation was 1.21 per cent on October 10, 2009 as compared with 11.30 per cent a year ago, and 0.84 per cent at end-March 2009. During the current financial year (up to October 10, 2009), WPI has increased by 5.95 per cent reflecting higher food price inflation aggravated by deficient monsoon.

Economic growth projections remained unchanged at 6.0 percent for the current fiscal – The growth projection for GDP for 2009-10 is placed at 6.0 percent with an upward  bias. During the first quarter of 2009-10, real GDP recorded a growth of 6.1 percent, lower than the growth of 7.8 percent in the corresponding quarter of 2008-09, but marginally higher than the 5.8 percent growth in the second half of 2008-09. The Central Bank expects agricultural production in 2009-10 to be lower than in last year led by weak south-west monsoon rainfall, which will impact the Kharif production. On the other hand, the prospects of the industrial sector have become more promising than they were at the time of the First Quarter Review. The large fiscal and monetary stimulus measures have bolstered domestic consumption and helped the recovery in the industrial sector. Thus considering a modest decline in agricultural production and a faster recovery in industrial production, the baseline projection for GDP growth for 2009-10 has been left unchanged at 6.0 percent with an upside bias.

Lending to real estate sector to get tighter -The RBI has increased the provisioning requirement for advances to the commercial real estate sector classified as ‘standard assets’ from the present level of 0.40% to 1%, a move that makes lending to the sector tougher. The central bank move will put more pressure on commercial and retail segments, which have not seen as much of a recovery as the residential segment. Citing a large increase in credit to the sector over the past year and the extent of restructured advances, the RBI said it would be prudent to build a cushion against likely non-performing assets.

Stricter NPA norms for Banks- The RBI has 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. The coverage ratio is a measure of the bank’s ability to absorb potential losses for non-performing assets (NPAs) and is arrived at by calculating the loan loss reserve balance with the total non-performing loans.

Some Reactions from the Experts

Mahhendra Jajoo, Head-Fixed Income, Tata Asset Management  - "This is broadly in-line with expectation. The SLR hike is a little bit of an unexpected surprise. But most of the banks are anyway holding excess SLR, so on the ground, we don't know if it is going to make a sustainable difference. "But it is a first move towards normalising the situation. To that extent, banks will also have some bit of pressure on their balance sheet because they will need to buy more bonds at
lower rates".

HDFC Bank’s Chief Economist Abheek Barua - The hike in SLR would support the large borrowing programme of the Centre and states. “I see the RBI hiking the CRR in December 2009 or January 2010”.

Other Views

FUND VIEW - Fund managers react to monetary policy

Expert Views & Market Reaction - RBI holds rates, tightens liquidity

INDUSTRY VIEW - Company officials react to monetary policy

Investmentguruindia.com provides expert advice, recommendations, broking firm tips, reports, technical analysis, news and many more things for stock market, mutual fund, commodities, IPO, currency derivatives, F&O, world market.

With Inputs From MICROSEC

Imp Link: BSE, NSE, Sensex, Nifty, MCX, NCDEX

Keyword: Free Tips, Recommendation, News, Stock Market, Mutual Fund, Commodities, Currency Derivatives, World Market, IPO, Investment In India, Investment Guru India, Technical Analysis, NSE, BSE, MCX, NCDEX, Expert Advice, F&O, Nifty, Sensex, Indian Equity Market, Indian Mutual Fund, Indian Commodities , Indian Currency Derivatives, Indian  IPO, Updates, stock market today, stock trading, online stock trading, money market, buy, sell, currency market, market forecast, share trading, online trading, options trading investment funds, stocks shares, stocks and shares, share price, insurance, financial services, morning star, day trade, currency options, futures brokers