Amidst the rising inflation worries, the much awaited key policy rate cut in the annual monetary policy has been announced. After a gap of three years, Reserve Bank Governor D Subbarao on April 17 slashed short term lending rate, a move that will reduce the cost of home, auto and corporate loans.
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MAIN HIGHLIGHTS
* Repo rate cut 50 bps to 8.00 percent with immediate effect
* Reverse repo rate adjusts 50 bps lower to 7.00 percent
* Marginal standing facility rate adjusts 50 bps lower to 9.00 percent
* Cash Reserve Ratio unchanged at 4.75 percent
* Bank Rate adjusts to 9 percent with immediate effect
* MSF borrowing cap raised to 2 percent vs 1 percent of banks’ NDTL
* Banks can access MSF even if they hold excess SLR
* FY13 GDP growth projected at 7.3 percent
* March 2013 inflation projected at 6.5 percent
STANCE* Stance guided by slowdown in growth, fall in inflation
* Growth expected to have recovered slightly in Jan-Mar
* Economy clearly operating below post-crisis growth trend
* Headline, core inflation moderated significantly by March
* In Dec-Jan, inflation fell due to decline in food prices
* In Feb-Mar, fall in inflation rate was driven by core components
* Easing core components of inflation reflect demand slowdown
* Stance aimed at adjusting policy rates with growth moderation
* Stance to resist risk of inflation pressures re-emerging
* Stance aimed to give more liquidity cushion to financial system
* Limited space for further reduction in policy rates
* See policy steps stabilising growth near post-crisis trend
* Expect policy steps to contain risk of inflation
* See policy steps to contain resurge of inflation expectations
* See policy steps boosting liquidity cushion available to system
* To announce mid-quarter review of policy on Jun 18
* To announce first quarter review of FY13 policy on Jul 31
INFLATION* Upside risks to inflation persist
* Not much room for policy easing without adding inflation risk
* March inflation at 6.9 percent close to 7.0 percent projection
* Inflation scenario stays challenging going forward
* Food inflation has risen after a seasonal decline
* Inflation in protein-based items remains in double digits
* Crude oil prices expected to remain high
* Pass-through of global oil prices incomplete
* Element of suppressed inflation in coal, electricity
* Core inflation seen contained on effect of past rate hikes
* Companies’ performance shows pricing power has reduced
* Limited risk of administered prices translating to inflation
* Will condition perception of inflation in 4.0-4.5 percent
* Pricing power in the economy currently abating
* Need to up fuel prices to reflect cost of production
* For macroeconomic stability, need to link fuel prices to costs
* Food inflation likely to remain under pressure
* Headline inflation has moderated significantly below 7 percent
* Consumer price inflation shows price pressure still high
* Core inflation below 5 percent for first time in 5 years
GROWTH* Cut repo rate as growth below post-crisis trend rate
* Cut rate as growth decelerated significantly in Oct-Dec
* Slowing growth contributed to fall in core inflation
* Deviation of growth from trend is modest
* FY12 GDP growth of 6.9 percent close to RBI’s projection of 7.0 percent
* Assuming normal monsoon, FY13 farm growth seen near trend
* Industry expected to perform better in FY13 vs FY12
* Leading indicators suggest turnaround in IIP growth
* Trend rate of growth has declined from pre-crisis peak
* Economy may revert to post-crisis trend growth in FY13
* Supply bottlenecks main reason for trend growth decline
* Strategy to focus on supply constraints is imperative
* Crude oil price major risk to FY13 growth projection
* Fiscal situation risk to FY13 growth projection
* Current account deficit very high, unsustainable
* Financing current account deficit will pose major challenge
* Large government borrowing can crowd out credit to private sector
LIQUIDITY* Liquidity conditions moving towards RBI comfort one
* MSF limit hike to provide more liquidity comfort
* Will take proactive steps on liquidity, if required
BANKS* Banks’ penetration in rural areas has increased manifold
* To mandate SLBCs to chart roadmap to cover un-banked areas
* Need brick-mortar bank back up for financial inclusion initiatives
* Studying feedback on Nair report on priority sector loans
* Sets up panel to review short-term co-op credit structure
* To issue norms on new urban co-op bank licences end-Jun
* IBA group studying pending Damodaran panel recommendations
* Banks cannot levy prepayment fee on floating rate home loans* Banks must have board-approved policy on deposit pricing
* Wide variations in retail-bulk deposit rates* Variation in bulk-retail deposit rates must be minimal
* High bulk deposit rates unfair to retail depositors
* Banks must start providing unique customer identification code
* Banks must offer basic savings accounts under financial inclusion
* Final Basel-III capital norms implementation by end-April
* To issue final Basel-III risk management norms by end-May
* Cut banks’ exposure cap to gold loan NBFCs to 7.5 percent vs 10 percent
* Banks must have internal aim for loans to gold loan NBFCs
* Sets up working group to study NBFCs lending against gold
* Working group on gold loan NBFCs to submit report July
* To issue norms on early non performing assets identification soon
* Banks must have board level policy on unclaimed deposits
* Draft norms on NBFC regulatory framework by end-June
* Panel on bank supervision to submit report end-July
* Final norms on securitisation by end-April
* Witnessed significant increase in gold loans by NBFCs
* To issue draft norms on overseas investment by core investment companies April
* Working group to study more long-term loan rate products by banks
* Banks loan recast working panel to submit report end-July
* Report of working group on credit pricing by end-July
* Panel to study feasibility of long-term fixed rate loan products
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