The policy is a mixed bag - some moves were expected and obvious; some bouncers; some clear signals; and some with a view to either keep the markets confused or the central bank itself is not sure of a direction. Overall, the policy is rich in contents. The hike in the interest rates clearly depicts the stand of the Central Bank that interest rates have bottomed out.
The hike in the CRR earlier was probably one such indicator of an impending hike in the repo rate as well. In a subtle way, the credit policy indicates that the interest rates are bound to rise and the inflation. The policy is not willing to bet on lower inflation and, in fact, gives more than one reason that could drive the inflation rates up.
The policy highlights the risks emanating from the global oil prices and hints at the fact there may be a risk of stronger adjustments especially if less than adequate adjustments are made in a timely manner.
In fact the RBI seems to believe while the overhang of excess liquidity was largely managed, supply shocks on account of oil and commodity prices have surprised on the upside.
While much of the hike in the overall inflation can be attributed to the supply side factors, the report also seems to suggest that some (albeit a much smaller portion) of the rise could also be attributed to demand pressures. The response of inflation to supply shocks is quick but transient while the response to demand shocks is more subtle but persistent.
The Central Bank's concern over the rapid growth in retail loans especially housing loans is very clear. It has suggested banks having a proper risk management processes and as temporary counter cyclical measures, the risk weight in the case of housing loans has been increased from 50 percent to 100 percent and from 100 percent to 125 percent in the case of consumer credit including personal loans and credit cards.
At a time when the credit growth is picking up to the retail sector and which is needed for the higher GDP growth, imposing such higher risk weightages is a step backward.
Decreasing the limits, on participation in the overnight call money market by non-bank entities is as per the plan, but will definitely put the mutual funds in a difficult situation. The credit policy is positive for the CP markets, as it could become more vibrant and better price discovery might be possible.
It is quite comforting to note that the Central banks remain largely comfortable with the external sector position of the country. Of course, the policy does indicate some areas of concern.
For emerging oil-importing countries like India and China, the impact of rising energy costs would be more given a higher oil intensity as well as lower energy efficiency.
While exports have been growing at a rapid pace, there has also been a widening of the trade deficit, which to some extent reflects higher oil prices as well as growth in non-oil imports.
