| |
Our stance and steps should be viewed not in response to what is happening today but in the context of a reasonable assessment of the outlook for the next 1-2 years.
Why has the bank rate been kept unchanged?
The current interest rate scenario is related to near and immediate outlook. But medium to long term objective is to keep inflation below 5 per cent and for this the policy rate should be 6 per cent.
Hence, we are not changing the policy rate as we still believe the current conditions are somewhat extraordinary circumstances. But how we have to recast in the near future would deepened on how global imbalances work out and how demand and supply factors within the country work.
|
| |
| Why is he is worried on the high deposit and credit growth in the first quarter?
|
| |
| Banks need to ensure credit quality. Credit has been growing far faster than deposits. A more sustainable balance is required between deposits and credit growth. It would be very difficult to maintain non-food credit growth at around 30 per cent unless deposits increase.
|
| |
| While in the case of credit it is possible to adjust government securities portfolio in the short run, but to mobilise deposits particularly retail is not possible in the short run.
|
| |
| The way forward for banks is to concentrate on deposit mobilisation and ensure credit quality and growth is not too high compared to availability of deposits. This implies that growth cannot be maintained at 30 per cent. It has to decelerate a bit.
|
| |
| Now how far it falls remains to be seen. RBI has said if banks are able to raise deposits successfully, then we would be comfortable with higher credit. A balance is required to ensure credit growth is healthy and sustainable.
|
| |
| What does RBI mean by monetary policy cannot be undirectional for prolonged period of time?
|
| |
| The response of our monetary policy to global developments should be pre-emptive at signs of heightened uncertainties but should also be willing to discern possible trends towards normalcy.
|
| |
| Thus, monetary policy may not be unidirectional for a prolonged period, recognising that the pace of changes in the global economic and financial environment is far more rapid now than ever before.
|
| |
| As far as global developments are concerned, we should be lot more nimble footed to be able to recognise what is happening in globally and be prepared to move in either direction over the longer term. This is more in the context of overall analysis of the global economy.
|
| |
| If anybody thinks this is a signal that very soon we expect a change in the global sentiment or change in direction of the global monetary environment, that is not the intention. But what is intended today is not to be surprised if changes occur swiftly. In such a case we must be ready to move in either direction.
|
| |
| How will the rate hike control or affect money supply?
|
| |
| The 15 per cent M3 growth target is indicative but we have been generally on the higher side compared to what has been anticipated. Money supply may be considered more indicative now while there is greater reliance on the interest rate instrument. Between the two, we would really give greater weight to the interest rate situation.
|
| |
|
| |
| POLICY SNAPSHOT
|
| |
| Non-food credit growth
Non-food credit of scheduled commercial banks increased by Rs.37,749 crore (2.6 per cent) up to July 7, 2006 compared with an increase of Rs 19,948 crore (1.8 per cent) in the corresponding period a year ago. This is the highest first quarter expansion in the past five years.
|
| |
| Retail lendings
Retail lending rose by 74 per cent on a year-on-year basis with growth in housing loans being 115.5 per cent. Loans to commercial real estate rose by 101.3 per cent.
|
| |
| Corporate lendings
The year-on-year growth in credit to industry was 26.0 per cent by May 2006. Substantial increases were observed in credit flow to industries such as infrastructure (34.7 per cent), metals (37.6 per cent), vehicles (37.9 per cent), gems and jewellery (43.5 per cent) and construction (52.6 per cent).
|
| |
| Deposit growth
Aggregate bank deposits increased by Rs.68,499 crore (3.2 per cent) up to July 7, 2006 against an increase of Rs.19,435 crore (1.1 per cent) in the corresponding period of the previous year. This is the highest deposit accretion any comparable period since 1993-94.
|
| |
| Money supply
Money supply (M3) growth at 18.8 per cent by July 7, 2006 was higher than 13.8 per cent, a year ago and above the projected trajectory of 15 per cent.
|
| |
| Reserve Money
On a year-on-year basis, the expansion in reserve money as on July 14 was of the order of 16.0 per cent, lower than 18.0 per cent a year ago.
|
| |
| WPI Inflation
Inflation, measured by variations in the wholesale price index (WPI) on a year-on-year basis, rose from 4.1 per cent at end-March 2006 to 4.7 per cent as on July 8, 2006. Inflationary pressures are mainly reflecting the pass-through of the hike in administered prices of petrol and diesel effected on June 6, 2006.
|
| |
| CPI Inflation
On a year-on-year basis, inflation based on the consumer price index (CPI) for agricultural labourers and rural labourers increased to 7.2 per cent each in June 2006 from 2.7 per cent each a year ago. The year-on-year CPI inflation for industrial workers and urban non-manual employees was placed at 6.3 per cent and 5.8 per cent in May 2006 as against 3.7 per cent and 4.2 per cent, respectively, a year ago.
|
| |
| Govt market borrowing
Gross market borrowings of the Central Government at Rs.69,533 crore (Rs.60,282 crore a year ago) during 2006-07 so far (up to July 17, 2006) constituted 38.2 per cent of the budget estimate while net market borrowings at Rs.34,572 crore (Rs.39,234 crore a year ago) constituted 30.4 per cent of the budget estimate.
|
| |
| Hike in deposit rates
Banks increased their deposit rates by about 25-100 basis points across various maturities between March 2006 and July 2006.
|
| |
| Hike in lending rates
The benchmark prime lending rates (BPLRs) of PSBs and private sector banks moved to a range of 10.75-11.50 per cent and 11.00-14.50 per cent from 10.25-11.25 per cent and 11.00-14.00 per cent, respectively, in the same period. |
| |
