RBI Monetary Policy Review

What is new?

(1) Key Rates Kept Unchanged except SLR

RBI Kept the key rates unchanged except for the SLR which has been increased by 100 bps in its second quarter monetary policy review.

Rates	Percentage	Remark
Bank Rate	6.00%	Unchanged
Repo Rate	4.75%	Unchanged
Reverse Repo Rate	3.25%	Unchanged
CRR	5.00%	Unchanged
SLR	25.00%	Up by 100 bps

A 100 bps points increase in the SLR would suck up over Rs.30,000 crore from the system. However, as the Banks are maintaining an average SLR of ~27.6%, the move is not expected to push the interest rates up.

RBI has brought Collaterised Borrowing & Lending Obligations (CBLOs) of the Banks under the net of Cash Reserve requirements with effect from November 21, 2009.

(2) Increase in Provisioning Requirements towards Real Estate Lending

RBI has increased the provisioning requirement for the bank lending to Real estate sector from 0.4% to 1%, which indicates that banks will have to keep aside a rupee for every Rs.100 lent to commercial real estate against the current 40 paise. This will result in increase in the loan pricing to commercial real estate projects and thereby increase the borrowing costs for over-leveraged real estate players.

Banks are also advised to enhance their provisioning coverage to 70% including floating provisions. The hike in provisioning for NPAs will negatively impact the Banks having low provision coverage ratio as they have to take a hit in their bottom-line in the coming quarters by increasing the provisioning. Major banks to be impacted under this are SBI, Canara Bank, BOI, IDBI, IOB etc.

(3) Infra NBFC Lending to link with Credit rating

RBI has guided that the risk weights on bank lending to Infra NBFCs will be directly related to the respective NBFC rating. Thus these NBFCs with low credit ratings will have to face increased borrowing costs. Also, RBI has discontinued with immediate effect the special refinance facility for banks and has also discontinued the special repo term facility for banks to lend to Mutual Funds, NBFCs and HFCs.

Other Comments:

(1) GDP - Forecast for FY10 at 6%.

RBI has maintained its GDP forecast for FY10 at 6% being cautious on the ground that delayed monsoons have had an impact on the agricultural growth. Despite of low agricultural growth, the IIP numbers have turned out optimistic reflecting a growth of 5.8% during April-August 2009 compared to 4.8% during the corresponding period previous year.

(2) Inflation Expectations - Increase from earlier 5% to 6.5%

RBI has upward revised its inflation expectations to 6.5% from earlier estimate of 5% for the fiscal on the back of rising food & commodity prices, domestic demand-supply imbalances and lower base effect.

(3) Money Supply – Downward revised to 17% from earlier 18%

The growth in Money Supply (M3) has increased from 18.6% in March’09 to 18.9% in October’09. The growth in bank credit has moderated significantly to 10.7% by October from a high of 27.4% a year ago. RBI has downward revised the M3 supply growth to 17% from 18% set in the previous policy due to lack of credit off-take.

RBI has projected the aggregate deposits of scheduled commercial banks to grow at 18%. However; it has downward revised the non-food credit growth to 18% from 20% set out before.

(4) No Change in HTM Cap

RBI has kept the HTM cap unchanged at 25% which will have no impact on the bond yields as it was largely expected.

Conclusion

RBI has maintained its accommodative stance in the policy and has indicated the need to move towards tightened monetary regime by increasing the SLR requirement by 100 bps to 25%. This gives a clear direction that RBI is targeting inflation in order to attain its targeted GDP growth. RBI has also directed banks to increase the provisioning towards commercial real estate lending which would negatively impact the over-leveraged realty players. However, it will help banks to increase their credit quality and thereby reduce the risk of delinquencies.