On hindsight, after all is over and done with, it is easy to look at the writing on the wall and see that the message was there all along. The first quarter macro economic survey was the preamble to the RBI Credit Policy. The skewed demand-supply situation in global crude; expectations of inflation to stay in the danger zone; lowering GDP projection to 7.9% from 8.1%; all pointed to one truth - things were not well with the Indian economy. Taking little comfort from the currently cooled down crude prices, which was clearly a temporary situation, it is little wonder then that the RBI Governor called for the economy to remain resilient. And this was the message on which the Credit Policy was based - things are tough, the slowdown in the economic growth rate is a concern but stemming the double digit inflation is more of a priority and keeping that in mind, the RBI has taken the corrective measures.
Like Arjuna keeping his eye focussed on the eye of the fish, the RBI Governor, Dr.Y.V.Reddy, in what could probably have been his last Credit Policy announcement, has gone straight for the jugular. With the priority being to only stem inflation, he shocked one and all by hiking the repo rates by 50 bps and CRR by 25 bps, which will come into effect from 30th August 2008. This was way ahead of the market expectations of a 25 bps hike in repo and CRR rates.
The immediate effect of this huge rate hike was that the bond prices dropped down and bond yield rose from 9.08% to 9.39%. The BSE Sensex slipped down below 14,000 levels and the Bankex was immediately down 4.5%.
The RBI has stated that on a realistic level, it wanted the inflation rate to settle at around 7% by March 2009 while the ultimate aim is to bring it down to 5% levels. The aim is to bring down inflation, thats it! Economic growth rate, as expected, is expected to take a hit. The RBI has as such lowered the GDP forecast from the earlier projected 8.1% to 7.9%. But after this round of rate hikes, the consensus is that it would not be surprising to see the GDP to actually settle at 7.3-7.6% levels.
The message which RBI has sent out by hiking the rates is that it wants to bring down the demand as that is the only way to bring down the prices. Banks would now have no option but to hike the interest rates. Bankers say that a 50-75 bps interest rate hike is inevitable right now. This rate hike would automatically cut demand. This is surely bound to have an adverse effect on the banking sector, automobile companies which to a large extent depends on auto loans, capital goods and infrastructure sector. Realty is also expected to take a hit.
There is no doubt that there is a lot of pain for the Indian economy in the short term. But at the same time, the message sent out is that the Central Bank of India is very vigilant and without being dictated by politics, it has taken a very tough stance to curb inflation. This round of rate hike though very high, at least indicates that the RBI is concerned and inflation is a priority. Economic growth rate does not affect the common man on the street directly and immediately but soaring price does. So it is more of a priority to address the issue of prices.
Despite these tough measures, one does not know whether RBI would be able to meet the target of a 7% inflation in March 2009. If crude price decides to gallop again, there is no doubt that RBI would have no option but to step in again. For now, RBI is surely on the right track and liquidity management would continue to remain a priority. No one likes a bitter medicine but it probably heals better.
HIGHLIGHTS OF CREDIT POLICY
CRR rate hiked by 25bps to 9.0% with effect from the fortnight beginning August 30, 2008.
Repo rates hiked by 50bps from 8.5% to 9.00%
No change in Bank rates, remains at 6%; these are rates at which long term loans are given to companies and individuals.
Reverse Repo Rate kept unchanged at 6%.
GDP growth projection for 2008-09 revised from the range of 8.0-8.5% to around 8.0%, barring domestic or external shocks.
Like Arjuna keeping his eye focussed on the eye of the fish, the RBI Governor, Dr.Y.V.Reddy, in what could probably have been his last Credit Policy announcement, has gone straight for the jugular. With the priority being to only stem inflation, he shocked one and all by hiking the repo rates by 50 bps and CRR by 25 bps, which will come into effect from 30th August 2008. This was way ahead of the market expectations of a 25 bps hike in repo and CRR rates.
The immediate effect of this huge rate hike was that the bond prices dropped down and bond yield rose from 9.08% to 9.39%. The BSE Sensex slipped down below 14,000 levels and the Bankex was immediately down 4.5%.
The RBI has stated that on a realistic level, it wanted the inflation rate to settle at around 7% by March 2009 while the ultimate aim is to bring it down to 5% levels. The aim is to bring down inflation, thats it! Economic growth rate, as expected, is expected to take a hit. The RBI has as such lowered the GDP forecast from the earlier projected 8.1% to 7.9%. But after this round of rate hikes, the consensus is that it would not be surprising to see the GDP to actually settle at 7.3-7.6% levels.
The message which RBI has sent out by hiking the rates is that it wants to bring down the demand as that is the only way to bring down the prices. Banks would now have no option but to hike the interest rates. Bankers say that a 50-75 bps interest rate hike is inevitable right now. This rate hike would automatically cut demand. This is surely bound to have an adverse effect on the banking sector, automobile companies which to a large extent depends on auto loans, capital goods and infrastructure sector. Realty is also expected to take a hit.
There is no doubt that there is a lot of pain for the Indian economy in the short term. But at the same time, the message sent out is that the Central Bank of India is very vigilant and without being dictated by politics, it has taken a very tough stance to curb inflation. This round of rate hike though very high, at least indicates that the RBI is concerned and inflation is a priority. Economic growth rate does not affect the common man on the street directly and immediately but soaring price does. So it is more of a priority to address the issue of prices.
Despite these tough measures, one does not know whether RBI would be able to meet the target of a 7% inflation in March 2009. If crude price decides to gallop again, there is no doubt that RBI would have no option but to step in again. For now, RBI is surely on the right track and liquidity management would continue to remain a priority. No one likes a bitter medicine but it probably heals better.
HIGHLIGHTS OF CREDIT POLICY
CRR rate hiked by 25bps to 9.0% with effect from the fortnight beginning August 30, 2008.
Repo rates hiked by 50bps from 8.5% to 9.00%
No change in Bank rates, remains at 6%; these are rates at which long term loans are given to companies and individuals.
Reverse Repo Rate kept unchanged at 6%.
GDP growth projection for 2008-09 revised from the range of 8.0-8.5% to around 8.0%, barring domestic or external shocks.