Keynote Capitals presents key highlights of the credit policy of Reserve Bank of India

Estimates for 2009-10 (FY10)

•      Growth Projection  :  Real GDP growth forecasted at 6%

•      Credit growth and aggregate deposits growth projected at 20% and 18% respectively. Money Supply (M3) growth projected at 17%.

•      WPI inflation projected at 4.0% by FY10
Presently, WPI-based inflation is reaching close to zero and is expected to be in the negative territory in the early part of the current year. This expected negative inflation in India has only statistical significance and is not a reflection of demand contraction as is the case in advanced economies. Prices of manufactured products fell sharply, while that of the fuel group contracted, though inflation in case of food articles still remains high. Keeping in view the global trend in commodity prices and domestic demand-supply balance, WPI inflation is projected at 4% during the current year.

•      CPI-based inflation expected to moderate
CPI-based inflation is expected to moderate from its present high level but would continue to remain in positive territory throughout FY10.

•       Repo and  Reverse Repo rates cut by 25bps each
With this, the effective repo rate is 4.75% vis-a-vis 5% earlier and effective Reverse repo rate is 3.25% vis-a-vis 3.5%earlier. However, CRR and bank rate remain unchanged at 5% and 6% respectively.

•       Extension of ECB relaxation for all-in-cost limit to December
As per existing ECB policy, all-in-cost ceilings for ECBs are: LIBOR + 300bps for ECBs with average maturity period of 3 years and up to 5 years; and LIBOR + 500bps for ECBs with average maturity of more than 5 years. However, these all-in-cost ceilings have been dispensed with up to June 30, 2009. Subject to ECB proposals above prescribed all-in-cost ceilings, irrespective of amount of the borrowing will come under the approval route. Due to continuing tightness of credit spreads in the international markets, it is proposed to extend relaxation in all-in-cost ceilings to December 31, 2009.

•       Relaxing the FCCB buyback policy for companies
Companies can now buy back out of internal accruals $100mn of redemption as against $50mn earlier. Under the existing norms, RBI has been considering, under the approval route, proposals from Indian companies for buyback of FCCBs, out of internal accruals, up to US$50mn redemption value per company, at a minimum discount of 25% on the book value. Keeping in view the benefits accruing to Indian companies, it is proposed to increase the total amount of permissible buyback, out of internal accruals, from $50mn of the redemption value per company to $100mn, by linking the higher amount of buyback to larger discounts.   

•       Domestic financing conditions have improved whereas external financing conditions are expected to remain tight. Therefore, private investment demand is expected to remain subdued.

•       During 1st half of 2009-10, planned Open market operation purchases and MSS unwinding to add primary liquidity of about Rs1,20,000Cr which, by way of monetary impact, is equivalent to CRR reduction of 3.0%. This would  leave adequate resources with banks to expand credit.

•       Further Relaxations in  Branch Authorization  Policy
The current branch authorization policy requires banks to have a medium term plan in respect of branch expansion. The request to open off-site ATMs was a part of such plans. Now, it is proposed to allow scheduled commercial banks to set up offsite ATMs without prior approval subject to reporting. RBI will constitute a Group to review the extant framework of branch authorization policy with a view to providing greater flexibility, enhanced penetration and competitive efficiency consistent with financial stability.

•       Presence of Foreign  Banks in  India
In 2005, the Government of India and RBI laid out a 2-track approach aimed at increasing the efficiency and stability of the Indian banking sector. One track was consolidation of the domestic banking system, both in private and public sectors, and second one was gradual enhancement of the presence of foreign banks in a synchronized manner. The roadmap was divided into 2 phases, with the 1st phase spanning the period March 2005 - March 2009, and 2nd phase beginning April 2009 after a review of the experience gained in the first phase.

Amid the current global financial market turmoil, the RBI will continue with the current policy and procedures governing the presence of foreign banks in India. The RBI has decided not to allow entry of new foreign banks into the country or allow foreign banks to acquire stake in private banks. The proposed review will be taken up after due consultation once there is greater clarity regarding stability and  recovery of the global financial system.

•       Credit Rating Agencies
The RBI accorded accreditation to 4 SEBI registered credit rating agencies for the limited purpose of using their ratings for assigning  risk weights within framework of the Basel  II Accord.