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Credit Policy: RBI keeps rates unchanged

April 29, 2008

The Reserve Bank of India announced the Monetary and Credit

Policy on Tuesday. Following are the highlights:

 RBI hikes CRR by 0.25 per cent from May 24;

 Repo, Reverse Repo, Bank Rates unchanged.

 RBI projects economy to grow by 8-8.5 per cent in 2008-09;

 Inflation to be brought down to around 5.5 per cent in 2008-09 with

a preference for bringing it close to 5.0 per cent as soon as possible.
Going forward, the resolve is to condition policy and perceptions for
inflation in the range of 4.0-4.5 per cent so that an inflation rate of
around 3.0 per cent becomes a medium-term objective.

 High priority to price stability, well-anchored inflation expectations

and orderly conditions in financial markets while sustaining the
growth momentum.

 Swift response on a continuous basis to evolving adverse

international and domestic development through both conventional
and unconventional measures.

 Emphasis on credit quality and credit delivery while pursuing

financial inclusion.

 Scheduled banks required to maintain CRR of 8.25 per cent with

effect from the fortnight beginning May 24, 2008.

 M3 expansion to be moderated in the range of 16.5-17.0 per cent

during 2008-09.

 Deposits projected to increase by around 17.0 per cent or Rs

5,50,000 crore (Rs 5,500 billion) during 2008-09.
 Adjusted non-food credit projected to increase by around 20.0 per
cent during 2008-09.

Indian shares little changed ahead of credit policy meet

Indian shares were little changed ahead of the credit policy meet and amid
flat global cues, as investors prefer to wait for the central bank's decision on
interest rates in its battle against rising inflation.

The Reserve Bank of India (RBI), which on April 17 raised the cash reserve
ratio (CRR) by 50 basis points to 8 percent to drain about 185 billion rupees
($4.6 billion) of excess liquidity from the system, is likely to unveil a slew
of measures today to tackle inflationary pressures and the economic
slowdown in its annual monetary policy report for 2008-2009.

CRR hike expected, margins may be hit, say bankers

Decision on lending rate hike likely after Credit Policy on April 29

Mr B. Sambamurthy

April 17 Reacting to the 50 basis point increase in the Cash Reserve Ratio,
bankers said that given the inflationary spiral, the move by the Reserve Bank of
India was quite expected. Perhaps the timing was a bit of a surprise. They
expressed apprehensions that the move would affect their margins to some
extent and they may be forced to pass on the cost to the customers. However,
they would wait for the Credit Policy statement due on April 29 before taking a
decision on increasing lending rates.

Dr K. Ramakrishnan, Chairman and Managing Director, Andhra Bank, said the

profitability of banks will take a hit in the current financial year (2008-09) due to
the CRR hike. As far as Andhra Bank is concerned, we will have to set aside Rs
255 crore by the end of the year. As there would be no interest on this, the profit
will take a hit up to Rs 25 crore. There can be an impact on the bond market as
well. All banks have to take a call on various options including a hike in interest
rates on advances. A clear picture would emerge after the Credit Policy review.
As a listed entity, we also have to protect the interest of the shareholders. The
hike in CRR should be seen in the context of the Government’s concern to
contain the inflation.

Mr K. Ramakrishnan

Mr S.A. Bhat, Chairman and Managing Director, Indian Overseas Bank, said that
his bank’s ALCO (Asset Liability Management Committee) would decide about the
hike in interest rates. However, he pointed out that the hike in CRR would
increase his cost of funds by only about 10 basis points. He said that this did not
necessitate any increase in their prime-lending rate which was at 13.25 per cent.
Since the PLR was not cut earlier, there was no need to hike it now, he said. He
also felt that since inflation was more supply-side driven than due to demand
side pressures, he felt the CRR hike may not be fully able to achieve the
objective. He said that the RBI may have to consider steps to disincentivise
lending to some sectors such as real estate, stock market and traders who were
hoarding commodities.