Credit Policy 2007-08 breaks no new ground

Updated: Apr 29 2007, 07:37am hrs
There were no major changes in the Reserve Bank of India's (RBI's) monetary and credit policy. It projected an 8.5% growth in GDP for FY2007-08. There were no changes in the Bank rate (6%), CRR (6.5%) and repo/reverse repo rate (7.75%/6%). Credit Suisse's report on credit policy states, The repo rate may rise to 8.25-8.5% by the end of March 2008 as economic activity and monetary indicators show limited signs of slowing. The ceiling rate of interest payable by NBFCs (other than RNBCs) on deposits was raised by 150 basis points. Inflation is projected at 5% for this fiscal year and the medium-term target is pegged at 4-4.5%. Non-food bank credit is projected to increase by around 24-25%, a slowdown from the current levels of 30%.

The policy further states that appropriate liquidity has to be maintained to meet legitimate credit requirements, consistent with price and financial stability. The projected expansion of money supply (M3) is placed at 17-17.5%, amidst a global trend of money supply expansion

In case of the financial market the policy has proposed the inclusion of corporate bonds in repo. The average cut-off yield on 182-day T Bills is to be used as the benchmark for floating rate bonds. Also the RBI has allowed single entity credit default swaps.

Foreign deposits will be less attractive as the ceiling interest rate on FCNR (B) and NR(E)RA deposits reduced by 50 basis points. Overseas investment by mutual funds increased to $4 billion. The individual overseas investment limit increased from $50,000 to $1,00,000. To give variety to financial products, working groups will study the introduction of currency futures and interest rate futures. Franklin Templeton's report on the credit policy stated,The policy indicates a shift back towards focusing on growth momentum and defending the export competitiveness of the currency. The policy is likely to bring some relief to the consumers and the markets. But inflation is still a concern.