RBI hikes repo rate by 25bps

RBI governor Y V Reddy has hiked the repo rate by 25 basis points. The GDP
forecast has been cut to 6-6.5% and inflation
outlook upped to 6% from 5%.

The RBI has increased its signal interest rate - the repo rate by a quarter
percent to 4.75%, in the credit policy announced by
RBI Governor Y V Reddy today.

While indicating that growth and price stability will be balanced, the RBI has
signalled that inflation management will take
precedence. It has also increased it’s inflation target sharper than expected
to 6.5% from the earlier 5%.


The mid term review has lowered the GDP growth target to 6 to 6.5%. It had
earlier forecast growth at between
6.5 to 7%. The RBI says high oil prices and a deficient monsoon that came in at
87% of normal will hurt growth.
It warns that even this target could get upset by sharper than expected rises
in oil prices or a global slowdown.

The RBI expresses concerns over oil prices and says that the effects of the
increase here are yet to be
fully played out in the domestic economy. The bank says there are clear signs
of a pick up in investment
demand as indicated by strong growth in capital goods imports.

There is evidence that corporate expansion plans have been bought forward and
scaled up. As a result the
bank expects the growth of non-food credit is expected to increase by 19%
against an earlier projected 16.5%.

Following are highlights of the credit policy:

The bank rate has been left unchanged at 6%.

The repo rate has been hiked by 25 basis points, to 4.75%

The reverse repo rate has been left unchanged

GDP target has been lowered to 6-6.5%

Average inflation rate for the year has been raised by a whole 100 bps to 6.5%
from 5%.

Composite loan limit for SSI up from Rs 50 lakh to Rs 1 crore

The Cash Reserve Ratio, CRR, has been left unchanged

RBI has said that agriculture growth of 3% is unlikely to materialise

7 and 14 day Repos will be discontinued from November 1

M3 growth is projected lower at 5.4% this year, against 7.8%

Projected expansion of money supply has been retained at 14%.

Credit demand has been “far more than anticipated”, says the RBI

Non-Food credit is seen rising 19%, upped from the earlier call of a 16
–16.5% gain.

Global capital flows outlook is still seen positive

Ceiling on NRE rates has been raised to LIBOR plus 50 basis points

It says that capital goods import strength shows revival of investment demand

Current account surplus is likely to stay despite increase in imports

The government has completed 29% of the budgeted net borrowing target at Rs
26,233 crore,
and has completed 49.8% of the targeted gross borrowing target at Rs 75,044
crore, says the RBI

Central government revenue deficit is higher by 3.5% at Rs 62,906 crore, upto
August 2004,
compared to the same period last year. The gross fiscal deficit is up by about
20.8% at Rs 52,509
crore upto August 2004 compared to the same period last year.

Priority sector limit advances have been enhanced to improve farm credit.

Banks will increase disbursements to small and marginal farmers under the
Special Agricultural
Credit Plan, SACP, March 2007

Private banks have been urged to formulate SACPs from 2005-06 targeting annual
growth of 20-25%

Composite loan limit has been enhanced for SSI entrepreneurs from Rs 50 lakh to
Rs 1 crore.

Banks can extend direct finance to housing sector upto Rs 15 lakh under the
priority sector

Banks may finance distressed urban poor to repay debt to non-institutional
lenders

IBA to make suggestions to NCAER on the Kisan Credit Scheme

RIDF X established with corpus of Rs 8,000 crore

Bank finance to NBFC's for second hand assets

Further move towards pure inter-bank call money market

IPA's to report issuance of CP on NDS Platform by the end of the day

Automated value-free transfer of securities between market participants & CCIL
has been facilitated

Capital index bond is to be introduced during 2005-06 in consultation with the
government

Study group to be stepped up to strengthen the OMO framework

Booking of forward contracts by exporters/importers has been relaxed

Internal group on forex market has been constituted

Lending by Non bank entities to call market has been cut to 30% from 45% of
average lending in 2001

Second draft guidelines on "Ownnership & Governance" is to be put in public
domain soon

Temporary risk containment measures prescribed on housing and consumer loans

NBFCs have been encouraged to phase out public deposits

Detailed guidelines for Residuary Non Banking companies to be issued

Standing Advisory Committee on UCB's chaired by Deputy Governor is to meet on a
quarterly basis

National settlement system is expected to be operationalised in early 2005

CBDT to grant refunds upto Rs 25,000 crore through Electronic Clearing System
facility.

AD's can issue guarantee upto $20 m for importers.

Increase in credit to the following sectors has been announced: petroleum,
infrastructure,
electricity, construction metals, pharmaceuticals, automobiles

Reactions:

I-Sec says that the hike in repo rate has been as per expectation, and is a
logical step. It says
that going forward, yields might drift out given oil price rise, and interest
rate hike fears. It expects
another rate hike in the next few months, and says that the 10-year yield may
touch 7% in the next few weeks.