2nd Qly Review of the Credit Policy for the Fin Yr 2009-10

Note on the Reserve Bank of India Second Quarterly Review of the Credit Policy for the Financial Year 2009-2010

Policy Highlights
There has been 1% hike in the Statutory Liquidity Ratio for banks
No change in the policy rates
The inflation for the end of the financial year has been upped to 6.50% with an upward bias
Assuming a modest decline in agricultural production and a faster recovery in industrial production, the baseline projection for GDP growth for 2009-10 is placed at 6.0 per cent with an upside bias
Large global liquidity due to easy monetary policy followed by major central banks has led to sizeable financialisation of the commodities market, especially for those products that are prone to demand supply gaps. These developments may induce greater volatility in commodity prices in the coming years.
The LAF window has been absorbing over Rs.100,000 crore on a daily basis since May 2009, save for a few days on account of temporary increases in government balances. This evidences the large amount of liquidity in the system which could potentially result in an unsustainable asset price build-up.
The two non-standard refinance facilities: (i) special refinance facility for scheduled commercial banks under section 17(3B) of the RBI Act (available up to March 31, 2010), and (ii) special term repo facility for scheduled commercial banks (for funding to MFs, NBFCs, and HFCs) (available up to March 31, 2010) are being discontinued with immediate effect.
Liabilities of scheduled banks arising from transactions in CBLO with Clearing Corporation of India Ltd. (CCIL) will be subject to maintenance of CRR with effect from the fortnight beginning November 21, 2009.


Our Interpretation/ Analysis

The Central Bank in its policy statement has almost provided a hawkish stance. The major factor is on account of the expected inflation and also easy monetary conditions.

It is expected that the rates may remain stable for a period of time and hence not much of softening in rates can be expected for short term instruments. Infact it may happen that due to the CRR requirement on the CBLO borrowing the rates beyond 3 months may start to harden.

As far as the Government Securities and Corporate Bond markets are concerned the yields on the Government Securities may soften as there has been a hike in the SLR. The corporate bond markets spread may however not narrow much from here since the corporate requirement for credit is expected to large.

The special repo facility for Repo has been withdrawn from mutual funds with immediate affect. Hence the mutual funds would start to remain cautious as far as future investments are concerned which in turn may make the rates harden.


Kumar Nathani

Fund Manager – Fixed Income
Taurus Mutual Fund