Highlights of Reserve Bank of India's FY09 Annual Policy Statement

[K.Karthik Raja]

Highlights of Reserve Bank of India's FY09 Annual Policy Statement
Tuesday, Apr 29

MUMBAI - Following are the highlights of Reserve Bank of India's
Annual
Policy Statement for financial year 2008-09 (Apr-Mar):

KEY MEASURES
* Hikes cash reserve ratio 25 bps to 8.25% from May 24.
* CRR hiked on review of evolving liquidity situation.
* Holds reverse repo at 6%, repo rate at 7.75%.
* Keeps Bank Rate unchanged at 6%.
* First quarter review of RBI policy monetary measures on Jul 29.
* Ups home loan limit of 50% risk weight to 3 mln rupee vs 2 mln
earlier.
.
STANCE
* Important to take informed, timed policy decisions.
* Local factors to remain dominant for policy setting.
* To continue emphasising on anchoring inflation expectations.
* To ensue rate environment with high priority to price stability.
* To respond swiftly, continuing basis to evolving situations.
* To emphasis on credit quality, delivery for employment sensitive
sectors.
.
INFLATION
* Attempt to bring inflation down to around 5.5% in FY09.
* Aims at inflation close to 5% "as soon as possible".
* Targets 4.0-4.5% inflation going forward.
* Medium-term objective of inflation at 3% remains.
* Inflationary pressures amplified from high food, oil prices.
* Inflationary pressures seen remaining for some time.
* Elevated food, crude prices immediate challenge for policy.
* Risk to inflation from food, oil prices potent, real.
* Demand pressures persist, supply side response improved.
* Jan-Mar inflation picked up mainly on supply side pressures.
* Demand, supply pressures can hit inflation significantly.
.
MONETARY AGGREGATES
* Money supply growth remains high vs projection
* Aims to contain money supply growth 16.5-17.0% in FY09.
* Aims deposit growth of 17% or 5.5 trln rupees in FY09.
* Targets credit growth of 20% in FY09.
* Credit growth down FY08 on slowing in personal, home loans.
* Credit growth down FY08 also on slow down in realty sector.
* Deposit rates declined, but lending rates inched up.
.
LIQUIDITY
* Liquidity management to continue receiving top priority.
* Global developments increased uncertainty of flows to India.
* Large liquidity injections globally may lead to inflows.
* Need for more liquidity steps on sustained inflows.
* Need for more active capital, liquidity management ahead.
* LAF, MSS smoothed market rates, enabled orderly evolution.
* Unwinding of LAF, MSS to impact liquidity in period ahead.
* Volatile capital flows, govt cash balances complicate monetary
management.
* Possibility of outflows on global liquidity condition changes.
* Important to deal with large, volatile outflows.
.
GROWTH
* Has lagged, cumulative effects on growth, stability.
* Targets gross domestic product growth of 8.0-8.5% in FY09.
* Threats to growth, stability from global devpts increased
"considerably".
* Investment demand to remain driver of econ activity.
* Uncertainties to Indian economy appear less vs global economy.
* Sees only moderation, not slowdown, in India economy
* Expected decline in world GDP may temper growth in industrial, svcs
sectors.
* Volatile global markets may impact India's trade, flows, asset
prices.
* Domestic activity not immune to global developments.
* Financial stability to be priority on global issues.
.
External Sector
* High food, oil prices to pressurise external sector.
* Expects higher trade, current account deficits in FY09.
* Capital flows to continue financing external needs in FY09.
* Sizeable widening of trade gap on demand for non-oil imports.
* Net capital flows Apr-Dec 2007 2.7 times vs a year ago.
* Outward FDI more than doubled due to global reach on Indian
companies.
.
BANKING
==Commodity Hoarding==
* Banks should exercise caution on commodity loan.
* Bks should see commodity loans not used for hoarding.
* Bks must review rice, wheat, oilseeds, pulses loans.
* Bks must also review loans against warehouse receipt.
* Bks to complete commodity loans review by May 15.
* Bank to submit review of commodity advances to RBI.
.
==Banks==
* Close eye on bks with "origin and distribute" model.
* Need for more transparency on off-balancesheet items.
* More transparency needed regarding valuations of structured credit
products.
* To review risk weights, provisioning of off-balancesheet items of
banks.
* To OK RRBs to sell loan assets over 60% lending target in priority
sector.
* OK to Tier II urban coop bks to give home loan up to 5 mln rupees vs
2.5
mln.
* TO set up group on issues of credit delivery, credit pricing,
credit
culture.
* To give incentive, penalty to bk branches based on bk note exchange
service.
* To review norms on risk weights, provisioning of off-balancesheet
exposure.
* Norms on risk weights, provisioning of off-balancesheet exposure by
May 15.
* To set up panel for recommending suitable activities of SPVs of
banks.
* Panel set up to recommend off-site reporting of Indian banks.
* Reiterates all bks to migrate to Basel II by Mar 2009.
* Banks must use chosen credit rating agencies.
* Banks can't "cherry pick" assessments given by different credit
rtg
agencies.
.
==Infrastucture==
* Relaxes lending norm on infrastructure projects time overrun.
* Extends time overrun on infrastructure projects to 2 yrs vs 1 yr .
* To treat asset as substandard commencement date of production
overshoots 2
yrs..
.
FINANCIAL MARKETS
.
==Equity markets==
* Equity, FX mkts hit directly by global volatility.
* Local mkts not seriously affected by global turbulence.
* Equity markets reflected risk aversion, global uncertainty.
.
==Government bonds==
* FY09 policy to focus on developing efficient financial system.
* Floating rate bonds issuance will be considered at appropriate time.
* FRB issuance will take into account market condition.
* WMA limit to be fixed on half-yearly basis.
* WMA limit fixed at 200 bln rupees in H1 FY09, 60 bln rupees H2 FY09.
* Modalities of reducing time gap of gilts auction process being
worked out.
* Non-competitive bidding facility in SDL sale to be functional by Sep
2008.
* State-wise WMA limit unchanged at 99.25 bln rupees.
* Proposes to launch STRIPS in gilts end FY09.
* Activity of stripping or reconstitution of securities on PDO-NDS
platform.
* Direct access of NDS, NDS-OM participants mulled who maintain only
SGL
accts.
* To allow non-deposit taking NBFCs access to NDS-OM via CSGL route.
* Trading volume shifted to collateralised mkt from unsecured mkt.
* Greater reliance on call money borrowings can cause systemic problem
to bks.
.
==Corporate bonds==
* Pre-requisite before OK to repo in corp bonds is efficient price
discovery.
* Safe settlement also pre-requisite before OK to repo in corp bonds.
.
==FX, Commodity Markets==
* To put in place clearing settlement for OTC rupee interest rate
derivatives.
* Framework on currency futures to be finalised by May 2008.
* To allow domestic crude oil refining cos to hedge commodity risk.
* Local crude oil refining cos to hedge commodity risk on underlying
contracts.
* To OK local crude oil refining cos to hedge risk up to 50% of import
prev
yr.
* To OK cos to invest aboard in energy, natural resources over current
limit.
.
GLOBAL ECONOMY
* Sovereign wealth fund role as provider of capital carefully
assessed
globally.
* Sovereign wealth fund assessed following inadequate capital cushion
of FIs.
* Concerns exist that banks' risk pricing tools inadequate.
* Leverage degree in global financial mkt underestimated.