So the much awaited credit policy is out and our Reddy “garu” has pulled out some surprises (although not nasty ones).Let us look at some of the fall outs of the policy announced yesterday:

  • RBI has told the corporates, banks etc to be “vigilant and well prepared” to deal with higher volatility on the rupee dollar front – which means— guys I am not going to put too much effort into restricting rupee appreciation – so you guys take care of yourself
    • This is a good sign … I have long been of the opinion that too much protection is being given to the exporters – while this was necessary in the early stages of the development – it should have been stopped once our FX reserves touched 200 bnUSD. Moreover the exporters of our country have been pampered to the hilt and should now realise that they should grow up.
  • CRR hiked by 0.50 bps to 7%
    • This move will suck out close to Rs.13500 crores out of the system – not a major cause of concern for treasuries – because the liquidity floating around in the system is estimated to be around Rs. 1 lac crores. The bond yields reacted yesterday – but this was only a reaction to the announcement and is likely to settle down today. We have seen that the excess liquidity in the system was arising primarily due to the fact that deposits were growing rapidly while advances was showing a declining trend. This coupled with the RBI pumping rupee to support the dollar led to huge liquidity float in the system. Of course the banks will now have to make the effort of pushing advances and reduce costs on borrowings i.e. deposits.
  • Ceiling of Rs.3000 crores on reverse repo discontinued:
    • With the removal of this ceiling the call rates will now gravitate towards this rate which is presently at 6%
  • Long term repos to be introduced:
    • I have mentioned in my lectures that the short term yield curve is characterised by a zig zag pattern owing to volatility and unpredicability in the short run. With the introduction of 14 day and 28 day repos we might see some smoothening of this segment of the yield curve.
  • GDP growth at 8.5%
    • This growth has primarily been driven by the services and industrial sector – the farm sector outlook is still uncertain. Like discussed in the class – the RBI is faced with a dilemna of managing a high GDP growth on one hand and reigning inflation on the other.A High GDP together with a monetary system sloshing in liquidity is sure indicator of high inflation in the days to come – this will also result in higher interest rates (this is already indicated by a upward move of the CRR

The coming few months should be interesting as RBI unfolds its plans to tackle the strange situation that India is in now My call – we should see some tightening of the interest rates in the medium term and the RBI is likely to adopt a push pull strategy to control inflation and dollar.


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