Fresh Mint

RBI Governor has announced Annual Policy Statement for the year 2007-08 around noon today. Allaying fears of the market, key rates have been left unchanged. The earlier CRR hike of 25 basis points to 6.25, announced on March 30, 2007, will come into effect on April 28, 2007.

A perusal of the Policy shows that the objective of RBI is to progress the war on inflation without hurting the growth momentum. This is significant keeping in view the recent past when RBI rushed ahead with stringent measures to tame inflation, least bothered about the overall growth.

It is stated that the aim is to bring down the inflation to 5 percent during 2007-08. Going forward, the resolve is to condition policy and perceptions for inflation in the range of 4.0-4.5 percent over the medium term. It is a welcome measure. The earlier tolerance band was set at 5.0-5.5.

M3 money expansion will be pegged at around 17.0-17.5 per cent, which is currently hovering above 20%. In order to achieve this target, RBI has adopted following measures for accelerating outflow of funds:
i. the overseas investment limit of Indian corporates is enhanced from the existing 200 per cent of net worth to 300 per cent of net worth
ii. the limit for portfolio investments abroad in listed overseas companies by listed Indian companies is enhanced from 25 per cent of net worth to 35 per cent of net worth
iii. Prepayment of external commercial borrowings (ECBs) allowed upto US $ 400 million as against the existing limit of US $ 300 million by authorized dealer banks
iv. Permitting remittances on account of donations by corporates for specified purposes, subject to 1 per cent of their foreign exchange earnings during the previous three financial years of US $ 100,000 whichever is lower.
v. Permitting Indian companies to remit up to US $ 10 million as against the current limit of US $ 1 million for consultancy services for executing infrastructure projects
vi. the aggregate ceiling on overseas investment by mutual funds to be increased from US $ 3 billion to US $ 4 billion.
vii. remittance limit of US $ 50,000 to be enhanced to US $ 100,000 per financial year for any permitted current/capital account transaction or a combination of both by individuals.

How much bearing these measures will have on reducing the domestic availability of funds is a million dollar question. The measures at (i), (iii) & (vi) may, to some extent, aid the RBI’s initiative. Ceiling on the rate of interest payable on Foreign Currency Non Resident (FCNR) accounts have been reduced by 50 basis points. This is a bad news to NRIs, who have been taking advantage of the higher interest rates on their FCNR accounts. Inflow of funds may reduce a tad.
Notwithstanding, the larger picture emerging is that RBI has been preparing the stage for full float of rupee, albeit gradually.

Commercial banks can now heave a sigh of relief. Risk weight on domestic housing loans to individuals for loans upto Rs.20 lakhs has been reduced to 50 per cent from 75 per cent as a temporary measure, allowing flexibility to banks to extend loans to retail housing sector, with reduced provisions.
Non Banking Financial Companies (NBFCs) now onwards can pay upto 12.5 per cent interest on deposits.

Overall, it is a growth-oriented Credit Policy. Pragmatism is writ large across the fine print. Globally, financial risks have increased on account of various reasons including the behaviour of oil prices, adverse development in the US housing market and large leveraged positions in the financial markets. The scope and role of central bankers, particularly in the emerging markets, is increasingly coming under threats in the wake of global funds relentlessly chasing assets in the rapidly developing markets.
Cheers to Reddy Saheb for coming out with a feel-good Credit Policy in the midst of inflationary pressures