RBI's Annual Policy Statement for FY 2010-11 - Interest Rates May Rise?
RBI announced the new monetary policy for Fiscal 2010-2011 and the considerations which led to the formulation of the new policy. The excerpts from the monetary policy:
Indian Economy:
Growth Projection:
In India, economic recovery, which began around the second quarter of 2009-10, has since shown sustained improvement. Industrial recovery has become more broad-based and is expected to take firmer hold on the back of rising domestic and external demand. Under the assumption of a normal monsoon and sustained good performance of the industry and services sectors, for policy purposes, the Reserve Bank projects real GDP growth for 2010-11 at 8.0 per cent with an upside bias .
Inflation:
Three major uncertainties cloud the outlook for inflation. First, the prospects of the monsoon in 2010-11 are not yet clear. Second, crude prices continue to be volatile. Third, there is evidence of demand side pressures building up. Therefore, keeping in view domestic demand-supply balance and the global trend in commodity prices, the baseline projection for WPI inflation for March 2011 is placed at 5.5 per cent .
Risk Factors:
While the indicative projections of growth and inflation for 2010-11 may appear reassuring, major downside risks to growth and upside risks to inflation are:
++ The prospects of sustaining the global recovery hinge strongly on the revival of private demand which continues to be weak in major advanced economies. While recovery in India is expected to be driven predominantly by domestic demand, a sluggish and uncertain global environment can have an adverse impact.
++ If the global recovery gains momentum, commodity and energy prices may harden further which could add to inflationary pressures .
++ Any unfavourable monsoon rainfall pattern could exacerbate food inflation , and could also impose a fiscal burden and dampen rural consumer and investment demand.
Monetary Policy Measures for FY 2010-2011:
The Monetary Policy Statement for FY 2010-11 specifies the following monetary measures :
++ The repo rate has been raised by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect.
++ The reverse repo rate has been raised by 25 basis points from 3.5 per cent to 3.75 per cent with immediate effect.
++ The cash reserve ratio (CRR) of scheduled banks has been raised by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning April 24, 2010.
Expected Outcome:
The four major outcomes from the above policy action are:
++ Inflation will be contained and inflationary expectations will be anchored.
++ The recovery process will be sustained.
++ Government borrowing requirements and the private credit demand will be met.
++ Policy instruments will be further aligned in a manner consistent with the evolving state of the economy.
Way Forward:
The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation, closely and take further action as warranted.
Developmental and Regulatory Measures:
Over the last several years, the Reserve Bank has undertaken wide ranging financial sector reforms to improve financial intermediation and maintain financial stability. This process has now become more intensive with a focus on drawing appropriate lessons from the global financial crisis and putting in place a regulatory regime that is alert to possible build-up of financial imbalances.
A few important steps are planned in these areas which are highlighted as follows:
Interest Rates:
++ Mandating banks to switch over to the system of Base Rate from July 1, 2010 to facilitate better pricing of loans, enhance transparency in lending rates and improve the assessment of monetary policy transmission .
Financial Market Products:
++ Introducing Interest Rate Futures on 5-year and 2-year notional coupon bearing securities and 91-day Treasury Bills .
++ Introducing a reporting platform for secondary market transactions in CDs and CPs.
++ Setting up a Working Group to work out the modalities for an efficient, single-point reporting mechanism for all OTC interest rate and forex derivative transactions.
Credit Delivery and Financial Inclusion:
++ Permitting banks to engage any individual as banking correspondents (BCs) subject to banks' comfort level and their carrying out suitable due diligence.
++ Discussing with individual banks their Financial Inclusion Plans (FIPs) and monitoring their implementation.
++ Mandating banks not to insist on collateral securities in case of loans up to Rs.10 lakhs as against the present limit of Rs.5 lakhs extended to all units in the MSEs sector.
Regulatory Measures:
++ Treating annuities under build-operate-transfer (BOT) model in respect of road/highway projects and toll collection rights in some situations as tangible securities subject to certain conditions.
++ Allowing securitisation companies/reconstruction companies (SCs/RCs) to acquire the assets either in their own books or directly in the books of the trusts set up by them.
++ Treating Core Investment Companies (CICs) having an asset size of Rs.100 crore and above as systemically important core investment companies. Such companies be required to register with the Reserve Bank.
Customer Service:
++ Setting up a Committee to look into banking services rendered to retail and small customers.
++ Further strengthening the mechanism for implementing the Reserve Bank's guidelines on customer service, through on-site and off-site inspections.
++ Requiring banks to devote exclusive time in a Board meeting once every six months to review and deliberate on customer service.