**** *Review of Annual Policy Statement *
*for the Year 2010-11*
* *
*Policy Measures:*
- Hike in CRR by 25bps to 6.0% effective the fortnight beginning April
24, 2010
- CRR hike will absorb about Rs. 12,500 crs of excess systemic
liquidity. Month of April saw on an average Rs. 73,600 crs of Net Reverse
Repo Bids while last two days has witnessed bids dropping below
Rs. 40,000
crs
- Reverse Repo Rate increased by 25bps to 3.75% from 3.5% with immediate
effect
- Repo rate increased by 25bps to 5.25% with immediate effect
- Bank Rate has been retained at 6.0 per cent
*Projections:*
*Factors*
*Current Estimates*
*Previous Estimates*
*Remarks*
GDP
8.0%
7.5%
Positive: Revised Upward
Inflation
5.5%
8.5%
At hindsight positive for bond market but indicates further tightening
measures
Credit Growth
20%
16%
Revising upwards M3 (money supply) implies that RBI intends to have higher
systemic liquidity, which is contradictory to its forethought of demand
pressure on inflation
Money Supply
17%
16.5%
*Key Developments:*
1) Reserve Bank has taken a number of measures to facilitate adequate
flow of bank credit to infrastructure sector.
a. In order to give a further thrust to infrastructure financing by
banks. Infrastructure loan accounts classified as sub-standard will attract
a provisioning of 15 per cent instead of the current prescription of 20 per
cent. To avail of this benefit of lower provisioning, banks should have in
place an appropriate mechanism to escrow the cash flows and also have a
clear and legal first claim on such cash flows.
*Impact: Positive for Banks & Infra Companies*
b. At present, banks’ investments in non-SLR bonds are classified
either under held for trading (HFT) or available for sale (AFS) category and
subjected to ‘mark to market’ requirements. Considering that the long-term
bonds issued by companies engaged in infrastructure activities are generally
held by banks for a long period and not traded and also with a view to
incentivising banks to invest in such bonds, it is proposed to allow banks
to classify their investments in non-SLR bonds issued by companies engaged
in infrastructure activities and having a minimum residual maturity of seven
years under the held to maturity (HTM) category.
*Impact: Positive for banks as well as infrastructure companies. For banks,
it is positive for their Investment Portfolio since mark to market exposure
to that extent will reduce. Moreover, banks will be comfortable extending
loans to infrastructure companies. *
c. *High Level Task Force on MSMEs: *(i) all scheduled commercial
banks should achieve a 20 per cent year-on-year growth in credit to micro
and small enterprises to ensure enhanced credit flow; (ii) any shortfall in
the achievement of sub-target of 60 per cent for lending to micro
enterprises of the total advances granted to the micro and small
enterprises, would also be taken into account for the purpose of allocating
amounts for contribution to rural infrastructure development fund (RIDF) or
any other Fund with other financial institutions as specified by the Reserve
Bank, with effect from April 1, 2010; and (iii) all scheduled commercial
banks should achieve a 15 per cent annual growth in the number of micro
enterprise accounts.
*Impact: Thrust to micro, small and medium enterprises.*
2) Recommendations of the Technical Advisory Committee (TAC) on the
Money, Foreign Exchange and Government Securities Markets, it is proposed to
introduce Interest Rate Futures on 5-year and 2-year notional coupon bearing
securities and 91-day Treasury Bills. The RBI-SEBI Standing Technical
Committee will finalise the product design and operational modalities for
introduction of these products on the exchanges.
3) In order to promote transparency in the secondary market
transactions for CDs and CPs, it is proposed to introduce a reporting
platform for all secondary market transactions in CDs and CPs.
*Policy Stance:*
*Following are the key excerpts from RBI: *
- Anchor inflation expectations, while being prepared to respond
appropriately, swiftly and effectively to further build-up of inflationary
pressures.
- Actively manage liquidity to ensure that the growth in demand for
credit by both the private and public sectors is satisfied in a
non-disruptive way.
- Maintain an interest rate regime consistent with price, output and
financial stability.
*Source: RBI*
*Key Apprehensions highlighted by RBI:*
- If Global recovery gains momentum, it will add to inflationary
pressures on account of increase in commodity & energy prices
- South West Monsoon is a critical factor for domestic inflation. Any
unfavourable pattern in spatial and temporal distribution of rainfall could
exacerbate food inflation.
- Risk of higher capital flows into emerging markets. Excessive flows
pose a challenge for exchange rate and monetary management.
- Overall size of the government borrowing programme is still very large
and can exert pressure on interest rates.
The above risk factors indicate that RBI is concerned about excessive
volatility in capital flows which may result into active intervention in
forex market. Moreover, RBI is also nervous about large govt borrowing
programme that may restrict concerted policy measures.
*Prognosis:*
q Next Monetary policy (i.e First Quarter Review of Monetary Policy
for 2010-11 on July 27, 2010) will be crucial for the markets as RBI has
already raised CRR by 100bps till now while Repo Rate & Reverse Repo rate by
50bps each. It will be critical for RBI to ensure non-disruptive credit
growth as well as smooth government borrowing in the backdrop of negative
real rates and its direction towards normalizing policy instruments. Our
conjecture is that another rate hike mainly in the form of increase in Repo
rate cannot be ruled out in the forthcoming policy. While, next CRR hike
would be imminent if capital flows remain buoyant and systemic liquidity
continues to remain surplus till July, otherwise it will counterfeit RBI’s
objective of non-disruptive govt borrowing as well as deter scredit growth.
q Impact on Debt Market: 10yr g-sec has already fallen by about 7bps
to 8.01% levels from yesterday's close; implying that longer end of the
yield curve has given accolades to monetary policy. The current movement
seems to be a temporary respite for the long term securities since markets
were discounting 50bps hike. However, we believe the recent auction cut-off
yields followed with lack of investment demand are not supportive for yields
and 10yr may trade in a narrow range of 7.95%-8.10% levels in the near term.
Short term yields are poised to harden from current levels with rise of
about 10-15bps and Call & CBLO rates to trade near 4.0% levels.
* *
* ***
--
Thanks & Regards,
Abhishek Kothari
--
You received this message because you are subscribed to the Google Groups
""GLOBAL SPECULATORS"" group.
To post to this group, send email to [email protected].
To unsubscribe from this group, send email to
[email protected].
For more options, visit this group at
http://groups.google.com/group/globalspeculators?hl=en.
<<image001.jpg>>
<<image002.jpg>>
