RBI Credit Policy The Reserve Bank has reviewed credit policy concluding that its prime task is to address stability of prices by effectively controlling the monetary supply. Therefore it has taken steps to reduce money supply adjusting short term interest rates to curb credit growth. Accordingly it has increased the repo rate by 50 basis points to 9.0 percent and cash reserve ratio has been increased by 25 basis points with effect from August 30th, 2008. The economic indicators have been revisited. GDP growth is likely to be around 8.0 percent as against 8.0 – 8.5 percent forecast earlier. Inflation is targeted to settle at 7% by March 2009 and all possible steps will be taken to achieve that. The long term goal is to achieve inflation rate of 3.0% and in the medium term inflation is to be kept under 5.0%. RBI has emphasized on inclusive growth, improving credit delivery and quality. RBI’s review had good points to cherish on the economic growth. GDP growth in 2007-08 was revised by Central Statistical Organization to 9.0 percent. Inflation based on whole sale price index continues to grow faster than consumer price indices for various categories of persons, the former being higher by almost 4.0 percent. Money supply as measured by M3 has increased by 20.5% and RBI would prefer to have this reduced to 17% to manage the high levels of inflation. The year on year growth of bank deposits till July 4th was lower by 2.9% signaling slow down in money supply. Oil companies received $4.3 Billion against their oil bonds. Increasing cash reserve ratio in effect has been used to finance what otherwise the oil companies would have claimed from the end users. By taxing the savers RBI has effectively asking savers to bear the cost of financing the oil marketing companies’ losses. There has been drop by a percentage point in the holding of government securities by banks, which dropped to 27.7 percent of their Demand and Time Liabilities. The long term government securities are yielding more, anticipating long term short fall in money supply. External sector has shown marked improvement in the first two months of current financial year. While imports fell by 6.1% as against 2.5% fall in export. Clearly the import oriented exports have been hit, as the terms of trade have turned adverse due to increasing inflation and rather a slow roll back of appreciation in rupee value. Continued increase in crude prices have resulted in an increase of oil imports by over 48%, it has also resulted in draw down in the foreign currency reserves to the extent of $ 2.6 Billion, more of the reserve drawn is attributable to slow down in capital flows into the economy. In the international front there has been slow down in economic growth. Crude prices have increased by more than 60% over the year. Developed countries are experiencing slow down as the relentless price increases are having an effect on them. Most central banks have initiated measures to curb money supply and arrest the spiraling prices. Domestic situation has clearly shown increased price pressure driven by demand outstripping production. Although the inflation is more driven by the petroleum product increase, there has been an ever increasing pressure from the all-round increase in commodity prices especially in cement and steel. RBI however noted that its measures to curb money supply are having effect, in as much the long term interest rates moving up and the deposit growth slowing down. RBI has clearly spelt out selective supervision of such banks that do not confine to lend within themselves, meaning that their sources of monies to support an unwarranted increase in loan portfolios will be closely scrutinized. The next policy announcement and mid term appraisal of economy will take place on the October 24th, 2008. Stock markets have little to cheer from these measures. Bank stocks are the worst hit as the increasing CRR and continued hike in interest will bring their growth down. Reserve Bank is determine to restrict the monetary expansion to 17% ensuring that the banks do not over expand their business and go slow in credit expansion. Consumer loans are expected to become very dear. Already the interest rates have touched 22 -24% at an unusually large spread of more than 12% over their long term cost of funds. RBI is sending signals to curb and reduce consumer loans, including home loans by increasing the repo rates and hiking the CRR margins. In short it is far preferable wait for some relaxation in RBI measures before investing in stocks.