RBI concerned about inflation; set to hike key policy rates

Ahead of its annual credit policy, the RBI said the government's inability to raise oil prices in line with increase in the international prices poses a "significant medium-term risk" to the economy

Mumbai: Hinting at a hike in key policy rates to contain price rise, the Reserve Bank of India (RBI) today warned that high inflation, driven by rising commodity and crude prices, poses a threat to the economic growth, reports PTI.

Another round of hike in key rates is likely to push further interest rates upwards, making loans dearer.

Ahead of its annual credit policy, the RBI also said the government's inability to raise oil prices in line with increase in the international prices poses a "significant medium-term risk" to the economy.

"Pass-through of global commodity prices, especially oil, has been as yet incomplete and constitute a significant medium-term risk," the central bank said in its report on Macroeconomic and Monetary Developments in 2010-11 released on the eve of its annual policy.

The RBI, according to experts, may raise its key policy rates by 25 basis points tomorrow to tame rising prices.

The RBI's analysis also that gross domestic product (GDP) growth is likely to mirror the trend in the past fiscal, though many downside risks have emerged.

Forecasting higher core inflation in the first half, the RBI report said headline inflation may moderate in the second half but could still be above comfort level, a signal that more monetary policy measures are likely tomorrow.

"Persistence of high inflation warrants continuation of anti-inflationary monetary stance to sustain the growth momentum over the medium-term," it said.

Sounding cautiously optimistic about the continued higher economic expansion, the report said the GDP growth is likely to mirror the trend in the past fiscal, though many downside risks have emerged.

"The risks to inflation from rising oil and commodity prices as well as domestic core inflationary pressures exist.

Unless addressed, they have a potential to adversely impact growth," it said.

"The high global crude prices and other commodity prices pose the biggest risks to our growth and inflation. Fresh pressures from commodity prices do make 2011-12 a challenging year for inflation management," the report added.

Pegging the current account deficit (CAD) significantly lower at 2.5% of GDP for FY10-11, from the earlier projection of 3%, the report however noted that spike in oil prices poses the risk of it widening.

Also the wild fluctuations in portfolio flows and rising debt flows pose risks to sustain lower CAD.

Meanwhile, public sector State Bank of India (SBI) said an increase in interest rates could lead to "derailing" the growth prospects of the country.

Inflation at present "is over 8% and an increase in interests rate can lead to the danger of derailing the growth prospects (of the country)," SBI chairman Pratip Chaudhuri said.

Further, he said that the bank was not is favour of deregulation of savings bank deposits and has sent its view to the RBI, stating that deregulation may not be necessary.


Will share prices fall for a seventh day in a row? Monday Closing Report

A move above Monday’s high may signal a change in trend. Or else…

As expected the market fell today for a sixth consecutive day. Both the Nifty and the Sensex have fallen for six days in a row. In the last six days, the Sensex declined 604 points and the Nifty lost 183 points.

In the past, when markets have fallen for six days in a row, what has been the outcome on the seventh day? In the period between July 1990 and 2nd May 2011, the Sensex has fallen for six days in a row on 79 occasions (excluding the current drop). Out of the past 79 instances, the market turned positive 42 times on the seventh trading day, while 37 times it continued in the negative. It's really a toss of a coin. A rally above 5,775, which was Monday's high, would be positive.

This morning, the market opened with gains, tracking the few Asian markets that were open today. But investors were cautious a day ahead of the Reserve Bank of India's (RBI) monetary policy. The anticipated rate hike seems to have been factored in today's fall. The Sensex and Nifty opened up 88 points and 17 points at 19,224 and 5,767, respectively. Soon, volatility took over, dragging the indices down into negative terrain. With no major triggers on the Asian front, the indices slipped further as trading progressed. The indices hit 18,955 and 5,688, their lowest since 30 March 2011. The Sensex and Nifty then recovered a little to close at 18,998 and 5,701, down 138 points and 48 points respectively. The advance-decline ratio on the National Stock Exchange was 482:1051.

Among the broader indices, the BSE Mid-cap index closed 0.94% lower and the BSE Small-cap index tanked 1.15%.

The top losing sectors were BSE Bankex (down 2.08%), BSE Consumer Durables (down 1.76%), BSE Oil & Gas (down 1.34%), BSE PSU (down 1.15%) and BSE Metal (down 1.04%). The major gainers were BSE Realty (up 1.14%), BSE Healthcare (up 0.40%) and BSE TECk (up 0.25%).

In the Sensex list, Tata Power (up 2.43%), Cipla (up 1.96%), DLF (up 1.66%), Bharti Airtel (up 1.36%) and Infosys Technologies (up 0.60%) were the top gainers. On the other hand, State Bank of India (down 4.06%), Sterlite Industries (down 2.26%), Maruti Suzuki (down 2.16%), Bajaj Auto (down 2.09%) and Reliance Industries (down 1.76%) ended at the bottom of the index.

Manufacturing output, as measured by the HSBC Purchasing Managers' Index (PMI) stood at 58 in April, marginally up from 57.9 in March. The latest reading indicates strong growth of the Indian manufacturing sector that was the fastest in five months.

Manufacturers reported a substantial rise in new business received during April. Ongoing improvements in market conditions and the high quality of goods produced were cited as the main drivers of growth. However, the rate of expansion eased slightly from last month's 31-month high. The increase in new export orders slowed to a three-month low.

Markets in Asia closed higher on signs of a steady global recovery, despite various issues like higher crude prices and strife in the Middle East and North Africa. Optimism from Japan about the future of the country's economy and the corporate sector also boosted the market. The South Korean government's move to give tax incentives to real-estate investment trusts that buy unsold housing, and establish a bank to purchase soured loans owed by builders and developers, also aided the gains.

The Jakarta Composite was up 0.78%, the Nikkei 225 surged 1.57% and the Seoul Composite jumped 1.67%. Markets in China, Hong Kong, Malaysia, Singapore and Taiwan were closed for trade today.

Institutional investors-both foreign as well as domestic-were sellers of equities on Friday. Foreign institutional investors sold stocks worth Rs689.89 crore, while domestic institutional investors were net sellers of shares worth Rs61.06 crore.


Differential credit limit for MFI borrowers likely

In January this year, the Malegam Committee had suggested a cap on the interest rates charged by micro finance institutions (MFIs) at 24% and also limiting the total loan cap to an individual at Rs25,000

New Delhi, May 2: The Reserve Bank of India (RBI) is likely to set different credit limit for loans extended to rural and urban borrowers by micro finance companies, while recommending a 24% interest rate cap on such loans, reports PTI.

An announcement to this effect is expected to be made by the central bank in its annual credit policy for 2011-12 tomorrow, sources said.

In January this year, an RBI committee, headed by YH Malegam, had suggested a cap on the interest rates charged by micro finance institutions (MFIs) at 24% and also limiting the total loan cap to an individual at Rs25,000.

Sources said after extensive discussion with the stakeholders, the RBI has come to the view that the quantum of loan extended to customers should depend on different parameters.

As such, the individual loan cap as suggested by the Malegam Committee is likely to be tweaked and the RBI would announce different limits for rural and urban customers, sources said.

The MFIs were allegedly charging interest rates of over 30%, which was along with their reported coercive recovery tactics.

As regard the loan recovery period, the RBI is likely to allow MFIs to recover their dues on a monthly basis. However, the repayment tenure would be less than 12 months for loans below Rs15,000 and less than two years for loans above Rs15,000.

The RBI had constituted the Malegam panel to suggest steps for streamlining the micro finance sector which drew flak for overcharging and use of coercive methods to recover loans from small borrowers.

On repayment, it said, the borrowers be given the option of weekly or fortnightly or monthly return of the loan.

About the regulations of MFIs, the Malegam Committee suggested that it should be done by the National Bank for Agriculture and Rural Development (NABARD) in close coordination with the RBI. At present RBI controls all profits for MFIs.

Micro finance—the business of doling out small loans at high interest rates to poor who are unable to access bank credit—has come under intense regulatory scrutiny, following an ordinance passed by the Andhra Pradesh government.


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