Review of the Credit Policy

[swapnil tambe]

Hiii....

The following are the key features of the review of the Credit Policy measures undertaken by the RBI yesterday. The banking regulator has hiked Key rates by 50 bps.

1. The unexpected 50 bps hike suggests that more rate hikes are likely and could go beyond 25 bps in September. Tightening is likely to end only if global commodity prices plummet or domestic agri-product prices crash. Neither seems likely.

2. The move suggests that RBI’s assessment of inflation is more dire (it revised its year-end inflation forecast up from 6 to 7%) than earlier based on higher fuel prices, agricultural commodity prices and persistently high inflation in non-food manufactured products.

Implications:

1. Going forward, there is a likelihood of a sub 8% growth rate.

2. Credit growth is likely to soften further and a year-end growth figure of 17% is a possibility.

3. The bond market will have to re-price a more extended rate hike cycle going ahead and this is likely to flatten the yield curve. The 7.80% 2021 gilt may get close to 8.5-8.60% by the end of H1FY11.

Thanks & Regards,
Swapnil Tambe.