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Corporates apprehensive about higher rates; bankers rule out any immediate hike on personal loan rates
Continuing with its policy of modifying policy rates in small doses, the Reserve Bank of India (RBI) today raised the short-term lending and borrowing rates by 25 basis points (bps) while keeping the cash reserve ratio (CRR) and bank rate unchanged.
The central bank said that based on current growth and inflation trends, it believes that the likelihood of further rate actions in the immediate future is relatively low. This is the sixth time this year that the RBI has raised rates to tackle inflation and tighten home-loan rules to check a property-market rally.
Although there are apprehensions in the corporate world that this latest move could lead to higher interest rates and impact economic growth momentum, bankers said personal loan rates will not go up for now.
With today's action, the repo rate (the rate at which the RBI lends to banks) has gone up from 6% to 6.25% and the reverse repo rate (the rate at which the RBI absorbs excess liquidity from the system) inched up from 5% to 5.25% with immediate effect. The CRR (the portion of deposits that banks are required to keep with the central bank) and Bank rate both remain at 6%.
State Bank of India (SBI) chairman OP Bhat told the Press Trust of India that the transmission mechanism between the RBI and the rest of the financial system does not work very fast and it always works with a time lag. "Whether it (the rate hike by RBI) will raise pressure on the system-eventually, it will. Whether there would be immediate reaction-not likely," Mr Bhat said.
Oriental Bank of Commerce executive director SC Sinha echoed a similar view. "I don't think there would be an increase in interest rates as the RBI move was already discounted," Mr Sinha said.
Indian corporates, however, have expressed apprehensions that the hike in short-term lending and borrowing rates could lead to higher interest rates overall, impacting the growth momentum of the economy.
Dr Amit Mitra, secretary general, FICCI, said, "Although the RBI has (hiked the rates) done so in the background of high inflation, we fear that this move could seriously impact consumption demand going forward as has been indicated in two surveys recently conducted by FICCI. This (the rate hike) in turn would adversely impact interest-sensitive sectors like consumer durables and auto which have led the growth hitherto, as also housing demand."
PTI quoted Assocham president Swati Piramal as saying that the policy rate hikes are likely to increase lending as well as deposit rates of banks immediately. However, the Confederation of Indian Industry (CII) was of the opinion that banks would not immediately raise lending rates. "We are reassured by the RBI's statement that it is unlikely to increase rates again in the near future," Chandrajeet Banerjee, director general, CII, said.
Between March and September this year, the RBI has hiked the repo rate by 125 bps to 6% in phases. The reverse repo rate has been increased by 175 bps to 5%, while the CRR has been raised by 100 bps to 6%.
"We expect inflation to come off in the next few months due to the higher base effect, which along with diminishing supply of government securities could give rise to further softening bias in interest rates. However, we have to watch the overall level of inflation and specifically food price inflation, as it remains the key trigger for any further action from the RBI," said Ramanathan K, chief investment officer, ING Investment Management (I) Pvt Ltd.
Expressing concerns with regard to the real estate sector, the RBI also announced a cap on the loan-to-value (LTV) ratio and increased the risk weight for home loans above Rs75 lakh. It said that in order to prevent excessive leveraging, the LTV ratio, in respect of housing loans should not exceed 80%. Irrespective of the LTV ratio, the RBI also increased the risk weight for residential housing loans of Rs75 lakh and above to 125%.
At present, for loans up to Rs30 lakh the risk weight on home loans with up to 75% LTV ratio is 50%. For housing loans above Rs30 lakh it stands at 75%. In case the LTV ratio is more than 75%, the risk weight of all housing loans, irrespective of the amount of loan, is 100%.
Reiterating its concern over the 'teaser rates' for home loans offered by lenders, the central bank said it observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates. In view of the higher risk associated with such loans, the RBI asked commercial banks to increase the standard asset provisioning for all such loans to 2%, from the current 0.4%, in order to provide cushion for any default.
Addressing the GDP (gross domestic product) issue, the RBI said that 8.8% growth in the first quarter of FY11 suggests that the economy is operating close to the trend growth rate, driven mainly by domestic factors. The South-West Monsoon was normal and this should boost agricultural output and rural demand. Most industrial and service sector indicators also point towards sustained growth, the central bank added.
The RBI said, notwithstanding some moderation in recent months, food price inflation has remained persistently elevated for over a year now, reflecting in part the structural demand-supply mismatches in several commodities-protein sources, oilseeds and vegetables also show this pattern.
Persistently rising food prices even in the wake of a normal monsoon raises concerns about the structural nature of food inflation and its consequent impact on inflationary expectations, the central bank said. Further, when the economy is growing close to trend, the risks of structural food inflation spilling over into prices of other commodities were significant and that could potentially offset the recent moderation, it said.
As per the new wholesale price index (WPI) series, the year-on-year inflation moderated to 8.5% in August 2010 and 8.6% in September 2010 after remaining in double digits during March-July 2010.
Yesterday, in its second quarter review of macroeconomic and monetary developments, the apex bank maintained that inflation is at a "disconcertingly high level" and that rising capital inflows and resultant appreciation of the rupee posed challenges to its efforts at managing the macroeconomic fundamentals without hurting economic growth, which of late has been losing steam.
Standardisation of security features on cheque forms
The RBI has said the prescription which prohibits alteration or corrections on cheques is applicable only to cheques cleared under the image-based cheque truncation system (CTS) from 1 December 2010. It will not be applicable for cheques cleared under magnetic ink character recognition (MICR) clearing, non-MICR clearing, OTC collection (for cash payment) or direct collection of cheques outside the clearing house arrangement, the central bank added.
Threshold limit under the RTGS System
The RBI has decided to increase the threshold limit for real-time gross settlement (RTGS) transactions from Rs1 lakh to Rs2 lakh. Similarly, to provide an incentive for customers who use the national electronic funds transfer (NEFT) a new value band in the Rs1 lakh to Rs2 lakh will be created. This will allow customers to pay lower charges compared to RTGS transactions.
Liberalisation in branch licensing of regional rural banks
The RBI said it has decided to allow regional rural banks (RRBs) to open branches in Tier-III and Tier-VI centres, identified in the Census 2001, without its prior permission but subject to fulfilling certain conditions.
Extension of area of urban co-operative banks
The central bank said that for urban co-operative banks (UCBs), with a minimum net worth of Rs50 crore, it had decided to lift restrictions on granting multi-state status and extension of area of operation beyond the state of registration.
Exposure of UCBs to housing loans
The RBI said it has decided to link housing, real estate and commercial real estate loans of UCBs to their total assets instead of deposits. Accordingly, the existing limit of 15% of deposits for housing, real estate and commercial real estate loans will be replaced by a limit of 10% of the UCBs total assets. For housing loans granted by UCBs to individuals for purchasing or constructing dwelling units of up to Rs10 lakh, an additional limit of 5% of the total assets will be available.
Exemption from share linking to borrowing norm
Borrowers from an UCB have to mandatorily subscribe to the shares of the bank, for an amount of 2.5% to 5% of their borrowings. However, UCBs which maintain a CRAR of 12% on a continuous basis will be exempted from the mandatory share linking norms, the central bank said.
Here are the highlights of the RBI's monetary policy review for Q2FY11
* Repo, reverse repo rate hiked by 25 bps with immediate effect
* Cash reserve ratio (CRR) unchanged at 6%
* Rate hikes to rein in rising inflationary expectations
* Rate hikes to sustain anti-inflationary thrust
* RBI says inflation remains high, aims to contain it in a range of 4%-4.5%
* Demand side inflationary pressures need to be contained
* Rising global commodity prices a cause for concern
* Inflation outlook depends on movement in food prices
* March-end inflation estimate at 5.5% under new WPI series
* Retains March-end inflation estimate of 6% under old series
* RBI policy retains FY11 M3 growth projection at 17%
* RBI policy retains FY11 non-food credit growth estimate at 20%
* FY11 GDP growth estimate retained at 8.5%
* RBI sees signs of pick-up in FY11 deposits, credit growth
* Home loan risk weight hiked from the current 100%
* Ups home loan risk weight of Rs75 lakh and above to 125%
* Realty prices in metros above pre-crisis peak levels
* Doubles threshold limit for RTGS deals to Rs2 lakh
* Huge forex flows to India expected on rate differentials
* Current account deficit a worry as forex flows volatile
* Large forex inflows also a challenge to monetary management
* Large forex inflows pose challenge to exchange rate
* Current account deficit of over 3% difficult to sustain
* FY11 current account deficit may surpass FY10 mark
* To take a view on microfinance companies after Malegam report
* Paper on foreign banks' presence underway
* To detail norms on fresh banking licences end-January.