Reserve Bank of India released its assessment of Indian economy and credit policy. When looks at the economic numbers it is clear that higher monetary expansion and marginally lower growth in FY 07-08 are being focused by the RBI as one of the reasons for the inflation. RBI has signaled by raising the cash reserve ratio to reduce the excess liquidity in system. Thankfully it has resorted to increase in repo rates that would have hardened the interest rates.

Credit policy announcement has number of welcome measures as also good data on sector wise growth. The data reveals that the gradual lowering of interest cost in the corporate profits accompanied by decline in the rate of sales growth in FY 08. Higher capital formation and investment spending have kept the pressure on supplies. The international crude prices have led to additional burden on the oil marketing companies although the Indian Government is funding their losses. The invisibles in balance payment are accounting for $ 50.5 Billion up from US $ 36.3 Billion in the April – December period. Remittance has jumped to $ 28.8 Billion compared to $ 202. Billion a year ago and software exports increased to 27.5 Billion compared to $ 21.8 Billion a year ago. In the capital flows India seems to have received the most getting $ 81.9 Billion as against $ 30.1 Billion with portfolio investments recording $ 33 Billion as compared to $ 5.2 Billion. All this has resulted in foreign exchange reserve swelling by $ 67.2 compared to $ 16.2 in the previous period. The valuation changes have accounted for $ 8.9 Billion showing good and thoughtful spread foreign currency reserves. These inflows have enabled the country to tackle a trade deficit of $ 72.5 Billion as the invisibles and capital flows have helped the country to balance payments.

RBI has analyzed the food price movements outside India concluding that the rise energy cost, crude oil price rise, drought in Australia, low inventories and surge in consumer demand to be the cause for phenomenal surge in food price during the year. It has also pointed out the toning down of the prices in the food prices in futures market as an evidence for the temporary nature of this price. Unfortunately the report does not mention the eroding farm surplus and diversion of farm land to bio fuel plants as undesirable to long term food security of the country and world.

RBI has presented as to how Thailand has imposed margins on capital inflows from affecting the economy. It has also enumerated the measures taken by the Chile, Korea, and Brazil etc to insulate their economies from the flow of hot monies ever since the US Dollar began depreciating. It has correctly identified the energy and commodity price increase to cause inflation world wide. Further the effect of sub-prime affecting the lending and growth of real sector has received a special mention.

While the credit policy statement has praised the Government for the budgeted level of gross fiscal deficit (2.5%) and anticipated market borrowing (Rs. 990 Billion) well within the limits of FRBM legislation, it has failed to mention or analyze the method adopted to fund the oil company losses (Rs. 90 Billion), wage increases (Rs. 40 Billion) and provision of loan waivers (Rs. 25 Billion) affecting the macro stability.

For the present RBI has chosen to hike the cash reserve ratio by 0.25% and has vowed to contain the monetary expansion within 17% so as to reduce the demand pressure on the inflationary expectation. It has laid a road map for trading in currency futures. RBI has permitted the crude oil refining companies to hedge their price risks in overseas market to their entire contracts in the domestic market and 50% of their exposure for the imports. This move is likely to ease the pressure on their margins and help improve their working. Overseas investments by Indian companies have been widened to include investments in energy and natural resources sectors over and above the existing limits after due approval from RBI. Indian exporters are allowed to capitalization of the export proceeds where the export receivables have crossed the repatriation limits (90 or 180 days and such other extended term). Further the software exporters are allowed 12 months to realize and repatriate the proceeds of exports. RBI has introduced number changes to target lending in priority sector and lending by regional rural banks. RBI has spelt out the guidelines limiting the project implementation to 2 years taking the banks out of projects where implementation is likely to be more than this period. It has promised to spell out the capital adequacy and provisioning guidelines by May 15, 08.

What does this mean to the investor?

India is determined to fight the inflation using fiscal (various duty cuts on imports of steel and other metals have been announced and the export will entail a duty in case of steel, as also food items are either restricted or taken out of exportable product list) measure and monetary policies. RBI has treaded carefully not to tamper with the present interest rates which are one of highest. The monetary policies will allow the growth of supply of money at 17% that is considered good enough to achieve the 8+ growth in the economy.  Further the RBI is also strengthening the currency and money market with more liberalized approach but with good regulatory measures to prevent any financial contagion from affecting the Indian financial system putting the real sector growth in jeopardy. Investors can breath easy as the RBI is letting the economy but is determined to cap the monetary expansion especially that arising from capital inflows that are short term in nature.

You can have more information and data from  

 www.cpolicy.rbi.org.in/