Annual Review of Monetary Policy 2012 – 13
RBI released the annual review of the Monetary Policy for 2012-13 on 17th April, 2012. The major highlights of the policy review are as follows:
Monetary Policy Stance
- The key policy rates under the Liquidity Adjustment Facility (LAF) are changed as follows, Repo Rate (RR) cut by 50 bps to 8.00%. Consequently, the Reverse Repo Rate (RRR) will be revised 50 bps lower to 7.00%, and the Marginal Standing Facility (MSF) rate will be revised 50 bps lower to 9.00%
- The Cash Reserve Ratio (CRR) kept unchanged at 4.75%.
- The Statutory Liquidity Ratio (SLR) rate kept unchanged at 24%.
- The MSF borrowing cap has been increased by 1% to 2% of NDTL (Net Demand & Time Liabilities).
Considerations behind the Policy Move
- To adjust policy rates in line with the current moderating growth.
- To keep in check any inflationary pressures arising from demand side factors.
- To ease the tight liquidity in the system.
Other Policy Measures
- Baseline GDP growth projection of 7.30% for 2012-13. Growth has moderated in the Q3 of 2011-12 and is expected to pick
- The inflation too seems to have moderated in Q3 of 2011-12, however the scenario ahead seems challenging. The WPI target for March 2012 is set at 6.50%.
- M3 growth projected at 15% for 2012-13.
Looking at the aggressive rate cut by the central bank we feel there would be lesser bandwidth for the RBI to cut rates further in the near future. However, there is room for further cut in CRR despite the recent improvement in liquidity as the supply side pressure of government bond auctions will continue to put pressure on liquidity.
- Banks will be mandated not to levy foreclosure charges or pre-payment penalties on home loans extended on a floating interest rate basis.
- Cap on Bank’s exposure to NBFCs with gold loans more than 50% of its assets, is reduced from 10% to 7.5% of its capital funds. Banks should also have internal sublimit on aggregate exposure to such NBFCs.
- Aniket More