Highlights of Third Quarter Review of Annual Statement on Monetary Policy for 2006-07, RBI Credit Policy

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Highlights of Third Quarter Review of Annual Statement on Monetary Policy for 2006-07

Highlights

Repo Rate increased to 7.50 per cent from 7.25 per cent.

Reverse Repo Rate, Bank Rate and Cash Reserve Ratio (CRR) kept unchanged.

The flexibility to conduct overnight or longer term repo including the right to accept or reject tender(s) under the liquidity adjustment facility (LAF), wholly or partially is retained.

GDP growth forecast at 8.5-9.0 per cent during 2006-07.

Inflation to be brought down as close as possible to 5.0-5.5 per cent at the earliest, while continuing to pursue the medium-term goal of a ceiling on inflation at 5.0 per cent.

Provisioning requirement increased to two per cent for standard assets in the real estate sector, outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans (excluding residential housing loans).

Provisioning requirement increased to two per cent for the banks’ exposures in the standard assets category to the non-deposit taking systemically important non-banking financial companies (NBFCs).

Risk weight increased to 125 per cent for banks’ exposure to the non-deposit taking systemically important NBFCs.

Interest rate ceiling on NRE deposits reduced from 100 basis points to 50 basis points above LIBOR/SWAP rates for US dollar of corresponding maturity.

Interest rate ceiling on FCNR(B) deposits reduced from LIBOR/SWAP rates to 25 basis points below LIBOR/SWAP rates for respective currency/ maturities.

Banks are being restrained from granting fresh loans, in excess of Rs. 20 lakh, against NRE and FCNR(B) deposits and being advised not to undertake artificial slicing of the loan amount to circumvent the ceiling.

Over the remaining part of the year, management of liquidity would receive priority in the policy hierarchy. Consequent upon the tightening of market liquidity, the impact of monetary policy is expected to be stronger than before.

The Reserve Bank would use all policy instruments, including the CRR, to ensure the appropriate modulation of liquidity in responding to the evolving situation.

The Reserve Bank will ensure that appropriate liquidity is maintained in the system so that all legitimate requirements of credit are met, particularly for productive purposes, consistent with the objective of price and financial stability. Towards this end, the Reserve Bank will continue with its policy of active demand management of liquidity through open market operations (OMO) including the MSS, LAF and CRR, and using all the policy instruments at its disposal flexibly, as and when the situation warrants.

Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy in the period ahead will be:

• To reinforce the emphasis on price stability and well anchored inflation expectations while ensuring a monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of the growth momentum.

• To re-emphasise credit quality and orderly conditions in financial markets for securing macroeconomic and, in particular, financial stability while simultaneously pursuing greater credit penetration and financial inclusion.

• To respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations and the growth momentum.