Apr 20, 2010|
Monetary Policy: RBI confronts inflation head on
It is yet another show of proactive tackling of economic concerns. The RBI has worded its annual monetary policy for fiscal FY11 very carefully. Keeping in mind the possible near term upsides to growth as well as the key variables impacting it. An erratic monsoon, slow global recovery, government borrowings and demand-led inflation all feature in the list. The first three may not be under the central bank's control. But it has done its bit to control the last and most important one.
The RBI has revised the benchmark rates that govern liquidity in its annul monetary policy today. The CRR (ratio of cash that banks need to keep with the RBI) has been hiked by 0.25%. At the same time the repo and reverse repo rates (rates at which banks borrow from the RBI and vice versa) have also had a similar increase. These are expected to ensure that there is no excess liquidity to fuel unreasonable demand At the same time, the RBI would not want to hamper growth or crowd out the government and private borrowing needs. The CRR hike for example is expected to suck out liquidity to the tune of Rs 125 bn from the system.
To improve its stance on managing liquidity, the annual policy also threw some light on the proposed base rate for banks. Unlike the original proposal, banks will now have the freedom to set their own base rate. Also the mechanism for the same has been left to the banks' discretion. It may be recalled that the RBI had earlier proposed to set the base rate on the pricing of cost of funds for a year. It also needed to include negative returns from CRR, SLR, operating cost and profit margin. But the banks will now have to come up with their own policies to govern their pricing power. We believe that unlike the earlier proposal, the revised one seems to hardly differ from the prime lending rate. While majority of lending may not happen below base rate, the base itself will differ from bank to bank. Thus the days of ‘teaser rates' are far from over we believe.
Apart from this, the RBI also touched upon its medium term plans to work on financial stability, financial inclusion, licensing of new banks etc. Delicate issues such as entry of foreign banks into the country and regulating compensation for private and foreign bank employees are also on the central bank's radar. Over the next few quarters, the RBI will evaluate suggestions made on each of these to ensure better regulation in Indian financial sector.
Interestingly, the statement highlights the key concern the RBI had cited in the earlier quarter as well. That of higher government borrowing. Notwithstanding lower budgeted government borrowings this fiscal than in FY10, fresh issue of government papers will be 36% higher YoY. This presents a dilemma for the RBI. To control inflation surplus liquidity should be absorbed. On the other hand, liquidity is necessary to meet borrowing requirements of the government and companies. The RBI therefore, has to do a fine balancing act. It needs to ensure that while absorbing excess liquidity, growth and borrowing are not impacted. A tough task at hand indeed. But so far, well done!
More Views on News
Aug 10, 2017
IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.
Aug 10, 2017
Asset quality will be the key thing to watch out for going forward.
Jul 31, 2017
Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.
Jul 6, 2017
Does the stock score on the value versus price equation?
Jun 27, 2017
Should one subscribe to the IPO of AU Small Finance Bank Ltd?
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407