Posts Tagged ‘NDTL’

RBI hikes policy rates by 25 bps, surprises on timing

The Reserve Bank of India (RBI) in the post market hours on Friday evening hiked its benchmark policy rates repo and reverse repo by 25 basis points (bps) in order to check the surging pace of price hike and cushion inflationary expectations which have been threatening to move out of central bank’s control.

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The hike while was well anticipated, the timing of the announcement was an absolute surprise. Analysts have been anticipating a mid-cycle hike right from the release of central bank’s annual monetary policy statement in April. However, the euro zone sovereign debt crisis and the recent liquidity crunch have been weighing on the side of keeping status quo on policy stance.

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The expectations of a mid-cycle action increased after the inflation data released in middle of May showed wholesale prices index (WPI) reaching double digit levels. The RBI however remained silent. Again when the empowered group of ministers (EGoM) hiked fuel prices on June 25, analysts expected RBI to act immediately to counter the inflationary impact of partial deregulation of auto fuels and hike cocking fuels. No action however came at that time.

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Now that the scheduled review is just around four weeks away (July 27), most economists were expecting that the RBI will wait for the policy review. However, surprising the markets in a classical way, the central bank increased the rates when no one was anticipating.

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Notwithstanding the surprise though, the policy action is a welcome move as inflationary tendencies have been increasing sharply over last few months. The central bank, according to many observers, is already behind the curve, and may have to pick up the pace of policy tightening going forward if the pace of prices hike in the non-food manufacturing space continues.

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The timing and extent of hike also suggests that the central bank will further raise policy rates in the scheduled review. In fact, by hiking by 25 bps now, the RBI has given itself more flexibility for the forthcoming review where it can now choose among a number of permutations and combinations of policy and reserve rate mix. It may choose to hike everything (repo, reverse repo and CRR) by 25 bps or may leave CRR alone and hike policy rates by 50 bps. A few other combinations are also plausible.

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Justifying the initial delay in policy action and the actual timing of the move, the RBI stated, “This mid-cycle policy action has been warranted by the evolving macroeconomic situation. Even as data for real GDP growth and WPI inflation became available by mid-June 2010, it was considered inadvisable to raise the policy rates as the financial system was dealing with liquidity pressures…Through the month of June, liquidity under LAF operations remained in deficit mode. Consequently, the call rate moved up significantly, resulting in an effective tightening at the short end of the yield curve. The liquidity situation has since begun to ease”.

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Since the RBI expects that liquidity may continue to remain tight for some time, it has also extended the additional liquidity support to scheduled commercial banks under the LAF to the extent of up to 0.5% of their net demand and time liabilities (NDTL) up to July 16, 2010. The measure was first put in place on May 26 after liquidity scenario tightened following the advance tax outgo and huge payments for the 3G spectrum by telecom operators and was earlier set to expire on July 2, 2010.

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While the two moves may seem contradictory, the RBI didn’t leave the matter to be explained by analysts and added in its statement, “It should be noted in this context that the liquidity easing measures have become necessary to manage what is essentially a temporary and unanticipated development. In no way should they be viewed as inconsistent with the monetary policy stance of calibrated exit, which remains focused on containing inflation and anchoring inflationary expectations without hurting growth”.

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RBI’s Monetary Policy – Analyst View

Hello Friends, last month we witnessed loads of action with the RBI’s monetary policy being laid down.

Just an extension of our previous blog “RBI’s Monetary Policy Stance – Part 3.

 

 

Analyst View RBI policy

RBI Monetary Policies and Projections Part 4

 


In this Blog we would read the Analyst views with respect to the monetary point of view.

Analysis from the Analyst from monetary point of view:

Though there is a hike in SLR to 25 % but we think it will not have much more impact because the total investment book of commercial banks is already at 30.4% of total NDTL.

Although key rates of CRR, reverse repo and repo rates have been left unchanged, special repo facilities have been withdrawn.

Real estate loans provisioning are set to become more expensive.

NPA norms for banks have been tightened while liabilities of scheduled banks arising from transactions in CBLO with Clearing Corporation of India Ltd. (CCIL) will be subject to maintenance of CRR.

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The RBI is thus attempting to withdraw liquidity from areas where excess liquidity had reached a point it was more than comfortable with, while also targeting better quality management of credit.

Another point is that in the policy stance, RBI has given first priority to keep a vigil on trends in inflation and to be prepared to respond swiftly and effectively through policy adjustments to stabilize inflation expectations.

Second, it will monitor the liquidity situation closely and manage it actively to ensure that credit demands of productive sectors are adequately met while also securing price stability and financial stability.

Lastly, RBI will maintain a monetary and interest rate regime consistent with price stability and financial stability, and supportive of the growth process.

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In conclusion, it bears emphasis that the Reserve Bank is mindful of its fundamental commitment to price stability.

It will continue to monitor the price situation in its entirety and will take measures as warranted by the evolving macroeconomic conditions swiftly and effectively.

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To conclude all the factors it seems that with the withdrawal of special liquidity measures together with an imposition of CRR in borrowing in CBLO market, RBI has taken a first to step towards controlling liquidity.

 

With prioritizing inflation it is expected that the next step of RBI could hike in CRR as it has also reduced the indicative growth of Broad money to 17% from 18%.

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RBI And Its Policies – Part 1

Hello Friends, last month we witnessed loads of action with the RBI’s monetary policy being laid down.

However here we bring more on the RBI policies and projections.

RBI policies and projections

RBI policies and projections

 

The Reserve Bank of India (RBI) laid the groundwork on Tuesday i.e. on 27th Oct in its monetary policy for a rise in interest rates by tightening credit to the commercial property sector, lifting its inflation forecast and warning of the threat of asset price bubbles.

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The RBI had injected in massive liquidity in the banking system in the past one year or so to help revive the domestic economy in the aftermath of the global financial crisis.

For now, the Reserve Bank has decided to keep the policy repo rate unchanged at 4.75 per cent, the reverse repo rate unchanged at 3.25 per cent and the (Cash Reserve Ratio) CRR of banks unchanged at 5 per cent of their (NDTL).


The following measures constitute the first phase of ‘exit’:

– The Statutory Liquidity Ratio (SLR), which has earlier been reduced from 25 per cent of NDTL to 24 per cent, is being restored to 25 per cent.

-The limit for export credit refinance facility, which was raised to 50 per cent of eligible outstanding export credit, is being returned to the pre-crisis level of 15 per cent.

The two unconventional refinance facilities:

(i) special refinance facility for scheduled commercial banks; and

(ii) special term repo facility for scheduled commercial banks [for funding to Mutual Funds (MFs), Non-banking Financial Companies (NBFCs), and Housing Finance Companies (HFCs)] are being discontinued with immediate effect.

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Further, the liabilities of scheduled banks arising from transactions in Collateralized Borrowing and Lending Obligations (CBLO) with Clearing Corporation of India Ltd. (CCIL) would now be subject to the maintenance of the CRR.

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Stay Tuned for more on this in our coming blogs.

We would cover Monetary Projections of RBI and Economy scenario and indicators at the moment.