RBI Credit Policy: What to expect?

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RBI governor D Subbarao will convey the central bank’s stance on the country’s monetary policy on Tuesday, 30th October 2012. This policy controls the tap of money in the financial system. View the presentation to know what to expect and the impact of this policy on India.

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  • With the ever increasing inflation its always good to stay updated with the latest RBI Credit policy. This information has been brought to you by Kotak Securities, We also offer live <a href="http://www.kotaksecurities.com/stock-market-news/equity/1000/equity-market/NSE/ALL/ALL">equity market news</a> & insights into the Indian share markets.
  • RBI Credit Policy: What to expect?

    1. 1. RBI Credit StocksDemystifying Policy What to expect?
    2. 2. IntroductionWith the increasing inflation, it may be wise to expect that your day-to-day borrowingcosts may not go down soon. Experts have begun to give their views on what theReserve Bank of India should do on 30 October 2012 when it announces its creditpolicy.RBI governor D Subbarao will convey the central bank’s stance on the country’smonetary policy. This policy controls the tap of money in the financial system. RBIlowers or raises borrowing rates.Companies, individuals want RBI to cut the borrowing cost so that it puts more moneyinto the hands of businesses and individuals. However, RBI has kept borrowing costshigh in a bid to fight the inflation. It is important to know what RBI does thisTuesday, 30th October. It is also important to know why RBI is taking a specific stance.
    3. 3. The Inflation BattleRBI’s main priority is to fight inflation. If inflation remains high, it eats into the growthof an economy. RBI is unlikely to lower borrowing rates if it feels that inflation is likelyto remain high. The whole sale price or WPI inflation has stayed close to 7.8 per centfollowing fuel price hikes in September 2012. Estimates from analysts suggest that itcould go well over 8 per cent.RBI plots monthly wholesale price inflation data on a graph. It looks at the trajectory orthe direction of that graph. Currently, it is pointing upwards. Food Inflation
    4. 4. Liquidity in the financial systemEven though interest rates are high, there isno sharp decline in the credit growth or theoverall borrowing from banks. Till earlyOctober 2012, credit growth stood at 15.9per cent.The demand for credit is met by the growthin bank deposits. That was slower at 13.9 percent. This means demand for money is likelyto remain high.RBI has to make money available. For thepurpose, it may either cut borrowing ratesfor banks called repo rates or cut the cashreserve ratio or CRR, a portion of depositsthat banks maintain with RBI.Many expect RBI to cut CRR to ease thepressure on the financial system.
    5. 5. Fiscal deficitThe way the government manages its budget makes a significant difference to theinterest rate scenario. If the government expenditure is more than revenue, it borrowsmoney from the RBI. This borrowing is the government’s fiscal deficit. Media reportssuggest that the RBI governor D Subbarao is concerned about the Indian government’sfiscal deficit for the full year 2012-13.The April-August 2012 central government expenditure rose 19.7 per cent, accordingto the government data. The budget estimates for this is 14.8 per cent for the full year2012-13. “Government spending accelerated to 32 per cent in August over last yeareven as gross tax revenue growth slipped to 7.9 per cent,” said an analyst at MorganStanley, a global bank in a note.This means RBI would look at how the government manages to control expenditure forthe balance year as it is already spending more than expected.
    6. 6. Stimulate growthThe rising fiscal deficit does not allow RBI to cut borrowing rates for corporates andindividuals. This is because it becomes a priority for RBI is to make money available tothe government over businesses and individuals. This results in borrowing costs forbusinesses and individuals to go up. This is typically called ‘crowding out of privateinvestment’.If businesses or individuals cannot get cheap money, they put expansion on hold. Theycut spending. This results in fewer jobs being created in the economy and hurts thegrowth. Hence, one needs to watch out for RBI’s commentary on the outlook forgrowth.
    7. 7. The OutlookThe monetary policy statement of RBI is worth reading for the commentary on theoutlook for the economy and monetary policy. RBI’s assessment gives a completepicture of the state of the economy.For a stock market investor, this becomes a lead indicator for future growth. If RBIhints at reducing rates consistently going forward, it means borrowing cost forcompanies could go down. Over the past three years, businesses have incurred 40 percent more interest burden as RBI hiked borrowing rates 13 times since March 2010. InApril 2012, it cut borrowing rates by 0.5 per cent.If borrowing costs are reduced further, they would directly improve prospects forgrowth and profitability of businesses.
    8. 8. Thank You • READ MORETwitter Website Facebook
    9. 9. • Registered office: Kotak Securities Limited, 1st Floor, Bakhtawar, 229, Nariman Point, Mumbai - 400021. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230, OTC INB 200808136, MCXSX INE 260808130.• Disclaimer: Investments in securities are subject to market risks, please read the SEBI prescribed Combined RDD prior to investing.• Correspondence Address: Infinity IT Park, Bldg. No 21, Opp Film City Road, A K Vaidya Marg, Malad (East), Mumbai 400097. Tel no: 66056825.

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