Thursday, April 26, 2007

Reserve Bank of India’s Monetary & Credit policy announced

The Reserve Bank lowered the growth forecast to 8.5 per cent and in order to keep the citizens happy, it promised to keep the inflation close to 5 %, with a medium term policy objective of keeping it in the range of 4 to 4.5 per cent.
It was a policy that was quite good. RBI had hiked key short term repo rate five times since June 06’ and Cash Reserve Ratio three times in two trenches since December. Bank Rate was unchanged at 6.0 %, while the reverse Repo Rate and Repo Rate were too unchanged at 6 % and 7.75 %, respectively.
The Chief highlights of this policy were: Steps to develop the corporate bond market, futures contract, establishment of credit information companies and a number of steps to help distressed farmers and micro-finance.

Projected GDP growth rate for 2007-08 will be around 8.5 per cent. It was decided to introduce Credit guarantee scheme for distressed farmers. Indian banks are now permitted to extend credit and non-credit facilities to step-down subsidiaries within the existing prudential limits and some additional safeguards. As a temporary measure, RBI announced that risk weight on the residential housing loans up to Rs. 20 lakhs to individuals would be reduced to 50 %, thereby making interest rates attractive for loans.

A significant feature of domestic developments in 2006-07 that is a matter of great concern is the increasing inflation rate. A careful assessment of the manner in which inflation is evolving in India reveals that primary food articles have contributed significantly to inflation during 2006-07. At the same time, prices of manufactured products account for well above 50 per cent of headline inflation.

“In the event of demand pressures building up, increases in interest rates may be advocated to preserve and sustain growth in a non-inflationary manner. Such monetary policy responses, however, increase the possibility of further capital inflows, apart from the associated costs for growth and potential risks to financial stability. Thus, foreign exchange inflows can potentially reduce the efficacy of monetary policy tightening by expanding liquidity.” People were quite happy after they knew about this and expressed their confidence.
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