RBI raises realty risk weight

Rates left untouched in quarterly review, bond market euphoric

The Reserve Bank refrained from any rate hike and opted for status quo in its first quarterly review of monetary policy even as it raised the risk weight on banks' exposure to the capital market as well as the real estate sector by 25 percentage points to 125 per cent.

Despite several global uncertainties, including the rising oil prices which have increased the risk factors, RBI Governor YV Reddy listed many domestic factors which indicate a "confidently growing economy in a stable environment".

According to him, the RBI took a decision in favour of maintaining growth momentum at this juncture but is "ready to respond to evolving circumstances". 

 

ALL-ROUND OPTIMISM Industrial growth shows a healthy uptrend Non-food credit growth buoyant and broad-based Govt borrowing programme smooth Money supply growth within projected trajectory Reserve money growth driven by expansion in domestic assets Industrial performance is strengthening, service sector growth positive WPI inflation, excluding energy related items, low and manageable

WORDS OF CAUTION Greater need to keep a vigil on potential bubble in the real estate sector Upswing in non-food credit growth, driven by housing and real estate. Need to ensure credit quality Overhang of liquidity substantial No evidence of generalised demand pressures, though credit growth unusually strong Progress of monsoon and movements in global oil prices major determinants of supply factors that may continue to dominate the price situation

The policy statement highlighted that the performance of the industrial sector was improving and the indicators of growth in services were positive. Besides, the upturn in industrial activity was supported by pick up in investment demand and credit growth continued to be strong as industrial growth had revived after a long period of sluggishness.

The RBI also pointed out that the investment climate remained favourable with sustained corporate earnings and profits. The other comforting factors were the level of foodstock and foreign exchange reserves.

"The considerations in favour of status quo are evenly matched by those for a change in stance, but we have gone for the balance of convenience at this juncture. It's better to wait for the risks to unfold," said Reddy.

The bond market was euphoric on the RBI action. The 10 year, 7.38 per cent 2015 paper closed at 6.95 per cent as against a close of 7.16 per cent on Monday. Prices in the long-end papers went up by as much as Rs 3 and the medium and short term witnessed a price hike of more than a rupee and the volume swelled manifold.

Highlighting the "significantly faster" growth in banks' exposure to real estate, Reddy said banks were possibly taking "more than necessary" risks in raising exposure to this sector and they needed to exercise caution..

There is a "need to keep a vigil on potential bubbles in the asset markets since real estate market valuations have, in the recent past, been supported by low-interest consumer debt", the policy statement said.