What the experts have to say

CREDIT POLICY: ISSUES & INSIGHTS

Need to calm down bond markets

I do not see any fireworks in the Credit Policy with no interest rate hikes on the cards. But there may be some structural changes to calm down the bond markets.

There is a concern regarding the bond markets as it affects banks' treasury portfolios and the government borrowing programme. We expect a reversal in the risk weight applied to housing and other retail loans.

In the last credit policy, the RBI had increased the risk weight on home loans from 50 per cent to 75 per cent and on other retail loans, including personal and auto loans, from 100 per cent to 125 per cent. There is a need for amendment in the Sarfaesi Act as bad loan recovery through the debt tribunal has not been possible.

""M S Kapur,
Chairman & managing director, Vijaya Bank

No pressing need for rate revision

I do not see any hike in interest rates as there is no pressure to do so now. This may be done later to contain inflation. The challenge ahead is to maintain interest rates keeping in mind credit growth.

There is a thinking to link interest rates on loans to government securities. Maybe our economy is not mature enough to link all loan rates to the debt markets. Big corporates want to link their loan rates to the gilts markets.

The regulator may be examining ways to make the credit delivery channels to the rural sector more effective. The Kisan Credit Card for instance has not been able to make much progress. Compliance with Basel II norms and 'Know Your Customer' norms may find a mention in the policy.

""ON Singh,
CMD, Allahabad Bank

Interest rate neutrality to continue

The policy may continue its neutral interest rate stance. The repo rate or CRR may be left untouched. The prevailing bearish situation in the gilts market will also strengthen such a stance. A few factors also indicate towards this.

Firstly, the inflation outlook is fairly comfortable. Inflation may stay at sub-6 per cent levels for some time. Secondly, the liquidity situation is comfortable. Thirdly, the large government borrowing programme of Rs 165,000 crore for FY06 (Rs 83,000 crore in the first half) will prompt the RBI to keep yields in check as any increase will raise the borrowing cost of the government.

Lastly, global rates, except for the US interest rates, may have peaked and there may not be any serious hike in global interest rates through the rest of the year. Some of the issues expected to be addressed could relate to the introduction of inflation-linked and floating GoI instruments, new derivative instruments such as interest rate futures and options on interest rates, allowing short-selling in bonds and so on.

""Sashi Krishnan,
CEO, Cholamandalam MF

Interest rate futures to get a kickstart

Projecting monetary policy outcomes is always a tough call and this time is no exception. The RBI has to choose between a pre-emptive or a reactive policy action, the government pressure notwithstanding.

A pre-emptive 25 basis points repo rate hike to 5 per cent with the bank rate unchanged at 6 per cent perhaps is the best option which might obviate the need to go for more rate hikes later this year.

Based on this, I favour curve flatteners and long rupee positions. On the market development side, I expect interest rate futures to finally get a kickstart with PDs and banks being allowed to trade in them to a limited extent.

""Amit Bansal,
Head-treasury, Barclays Capital
"Views expressed are personal and do not represent the views of the bank"

A fine balance is the need of the hour

There is a need to strike a balance between real rates, economic momentum and inflationary expectations. Industry has grown at a brisk pace over the last year, driven by a strong manufacturing growth. Credit growth has been rapid (25 per cent and more).

Expected inflation, at 5-5.50 per cent, borders on the uncomfortable. Signs of demand-pull inflation are visible with finished goods producers getting back some pricing power. Central banks in the US, Australia and UK have raised rates to ward off inflationary pressures.

RBI itself had hiked the reverse repo rate by 25 bps 6 months back. Against all this, an optimum solution would probably lie in hiking reverse repo rate by 25 bps to 5 per cent (higher inflation and strong industrial growth justify targeting real positive rates) and cutting CRR by 50 bps (to free banking resources for credit demand and the government's own borrowings).

That may just be the best way to meet the challenges of such diverse economic circumstances as these. But would RBI do a split action, something that is not common to Indian markets? We'll get to know shortly.

"" Binay Chandgothia,
Deputy CIO & head-fixed income, Principal PNB Asset Management Co Pvt Ltd

Liquidity overhang is a concern

Managing liquidity in the banking system will be a challenge given the pick up in credit. Considering the huge credit offtake and government borrowing programme, the central bank could scale down the market stabilisation scheme.

The policy statement should make enabling provisions to develop the derivatives market. Banks should be permitted to trade in interest rate futures and options market.

There is a need to equip banks with more risk management products. Interest rate options has been a long standing demand of the bankers. Interest rates are expected to remain stable.

""G V Nageshwar Rao,
CEO, IDBI Bank (commercial banking SBU)

Bank rate revision required

A volatile bond market with the yield on 10-year gilt breaching 7 per cent mark, flaring global oil prices in excess of $50 per barrel with a rising forecast and inflation hovering well over 5 per cent, all this present an interesting build up to the policy announcement.

Fed chairman Greenspan by inducing 7 increases taking Fed rates to 2.75 per cent is making life a little difficult for the regulators.

However, a domestic liquidity overhang of Rs 30,000 crore and a decently building up forex reserves provide a bit of "hold up" comfort. It is widely believed, and recent fundamentals support it, that the bank rate should see an upward revision by at least 25 bps.

However, a more probable scenario is an upward revision of 25 bps in reverse repo. According to the RBI indications earlier, a CRR review necessarily does not have to be in the credit policy and may be used more as a dynamic liquidity management tool.

It is expected that this trend will continue. On the savings side, it is felt that the deposit rate should be freed for banks to manage competitive pressures more effectively. Again, some modifications in priority sector lending norms for banks may come.

The lending target may be brought down in stages from the current 40 per cent or its definition may be widened to include infrastructure lending (power ,telecom, cement, etc) under its scope. Finally, on external commercial borrowing (ECB), there is a strong case to restore the eligibility for select housing finance and infrastructure financing companies.

"" Ravindra Kumar,
Country head, wholesale banking, ING Vysya
"The views expressed are strictly personal"

Stability in forex, interest rates imperative

The credit policy will be closely watched in the backdrop of a volatile international markets. Apprehensions about a slowing US economy, the threat of inflation and rising interest rates are real concerns.

The focus will on ensuring reasonable stability in the forex and interest rate markets, and maintaining enough liquidity to meet credit demand. The RBI has a cushion in the form of CRR release and lower mobilisation under market stabilisation for this purpose. We expect credit growth at 18-20 per cent and M3 at 14-15 per cent.

While savings deposit rate may not be deregulated, a desirable move would be permitting repos in corporate bonds. Market players would also welcome initiatives in the OTC derivatives market, including sorting out some prevailing regulatory confusion.

""Ajay Sondhi,
Vice-chairman & managing director, Kotak Investment Banking

CRR, SLR limits likely to go

Notwithstanding rising inflation, rocketing oil prices and some domestic factors, there appears to be no rate hike expected either in repo rate or bank rate. A sharp hardening of yields in the secondary gilts market is a matter of worry and a possible repo rate hike at an appropriate time may happen.

There is also no expectation of CRR hike at this stage, though limit on CRR may go. SLR may go the same way while amending the Banking Regulation Act 1949. The market participants, especially PDs look forward to broadbasing of gilts market.

""RV Joshi,
Managing director, Securities Trading Corporation of India Ltd