Interest rates may increase 50 basis points, hit corporate expansion and retail loans.
The Reserve Bank of India (RBI) today announced fresh monetary tightening measures that are set to raise interest rates by around 50 basis points. This will make home and auto loans more expensive besides impacting the growth targets and fresh expansion plans of corporate India.
The markets reacted negatively with the benchmark Bombay Stock Exchange Sensex plunging 558 points, or 4 per cent. Banking stocks were hit the most with the sectoral index plunging 8.31 per cent.
The yield on the benchmark 10-year bond yield rose to 9.40 per cent, the highest in two weeks.
In the first quarter review of the Annual Statement on Monetary Policy, released this afternoon, RBI raised the repo rate, or the rate at which it lends, 50 basis points to 9 per cent, the third increase in two months.
In addition, the cash reserve ratio, or the proportion of deposits that bank set aside, will go up another 25 basis points to 9 per cent. This will suck out around Rs 8,500 crore from the system.
RBI Governor Y V Reddy, whose five-year term ends in September, indicated that the monetary policy may need to be tightened further amid an “accentuation” in inflationary pressures.
While the repo increase is immediate, the CRR will rise with effect from the fortnight starting August 30.
| 10-YEAR BOND YIELDS (%) | |
| July 29, 2008 | 9.27 |
| July 28, 2008 | 9.09 |
| Source : NSE WDM | |
Banks and companies were anticipating these moves but were caught by surprise by the extent of the increase. Companies said this will slow growth and impact their bottom line.
Bankers said projects in the pipeline may not be affected, but fresh expansion plans could be delayed. Standard Chartered Bank’s India head Neeraj Swaroop said, “We have not seen any impact on our existing clients… But as interest rates increase, demand may slow down.”
Following the statement, almost all bankers to whom Business Standard spoke said interest rates will go up. Punjab National Bank Chairman & Managing Director K C Chakrabarty said rates could go up as much as 100 basis points and the gap between the prime lending rate and the loans extended below this rate or sub-PLR loans will narrow.
However, with margins under pressure, the increase in deposits rates may be lower than that of the lending rates.
Reacting to the monetary policy, the finance ministry said today's rate increase was "a signal to the banks that credit growth must be moderated" and the measures adopted by the central bank and the government over the last two months will help in containing inflation.
| RBI to probe ‘leak’ of policy document India’s benchmark Sensitive index lost 60.28 points to reach 14,049.12 points within one minute at 11:40 am. Nothing unusual with the drop given current market conditions, global volatility and palpable nervousness ahead of the announcement of the Reserve Bank of India’s monetary policy 20 minutes later. In the next 10 minutes, the index fell another 100-odd points to reach 13,939.71 points at 11:50 am, or 10 minutes ahead of the announcement. Similarly, bond yields on 10-year government paper shot up to cross 9.15 per cent by 11.20 am from 9.03 per cent at 11.10 am and climbed further to 9.42 per cent by 11.50 am. |
The Reserve Bank governor Y V Reddy later owned up to a “leak” of the policy ahead of the formal announcement and ordered a detailed inquiry. Preliminary investigations revealed that the web managers or web masters inadvertently sent out e-mails to institutions “erroneously”.
“Our preliminary enquiries revealed that some institutions sent the first report on the RBI policy at 11:42 am and the e-mails containing the policy documents of the RBI policy measures went from the web managers at around 11:29 am instead of 12:00 noon. The web managers hired by us have intimated us that the e-mails did go out from them erroneously at about 11:20 am. We are making further inquiries to take necessary corrective measures. We deeply regret this unfortunate set of events,’’ Reddy said.
The twin moves are part of the central bank’s efforts to tame inflation, which was estimated at 11.89 per cent in the first half of July. RBI expects inflation to remain high for some more time as global crude oil and food prices have not moderated sufficiently.
RBI said it was committed to its inflation target of 5 to 5.5 per cent, but “recognising the evolving complexities in globally transmitted inflation”, it said that “at this juncture, a realistic policy endeavour would be to bring down inflation… to a level close to 7 per cent by March 31, 2009”.
Since June, Reddy has raised rates by 125 basis points and the cash reserve ratio by three-quarters of a percentage point. At 9 per cent, CRR is at its highest level since November 1999 and the repo rate the most since October 2000.
Reddy did not hide his preference for taming inflation over growth in the long-term interest of the economy and decided to settle for a lower gross domestic product growth target of 8 per cent for 2008-09, as against the earlier project of 8-8.5 per cent growth.
Banks kicked off asset liability committee meetings within hours of RBI’s decision, with State Bank of India being first off the block. The bank, however, did not announce its decision till the time of going to the press.
IndusInd Bank and ABN Amro said their Alcos are meeting on Wednesday with Union Bank of India and Central Bank of India scheduling a review for Thursday and Friday, respectively. Standard Chartered’s India team will meet next week to take a call on lending and deposit rates.
Among the housing finance companies, LIC Housing Finance said it will wait for a month, while HDFC executives remained incommunicado.
While rates may be a deterrent to many, banks are also planning to tighten the loan appraisal norms, especially after RBI warned of supervisory review of banks that have over-extended their credit portfolios relative to their sources of funds.
SBI Chairman O P Bhatt indicated that SBI will step up scrutiny of loan proposals, while Swaroop said that Standard Chartered had already started changing the mix in favour of secured loans.
