The RBI raised key policy rates by 25 basis points each and increased the CRR by 25 basis points to absorb excess liquidity. It forecast GDP growth of 8% for FY2011 and inflation to moderate to 5.5% by March 2011. The RBI aims to support credit growth while anchoring inflation expectations. It also took steps to broaden financial markets and strengthen stability.

1. RBI Annual Policy Statement FY – 2011 -- Puneet Piyush PGDM (Finance), LBSIM [email_address] +91 - 99539 76305

2. Highlights.. CRR hiked by 25 bps, it will absorb Rs. 125 billion Benchmark Repo and Reverse Repo rates hiked by 25 bps each to 5.25% and 3.75% respectively SLR and Bank Rate kept unchanged at 25% and 6%, respectively GDP forecast hiked to 8.0% with a positive bias for fiscal 2010-11 as compared with expected 7.2-7.5% in fiscal 2010 Bank credit growth expectations increased to 20% in fiscal 2011, compared to 17% in fiscal 2010 Bank deposit growth expectations increased to 18%, marginally higher than 17% reported in fiscal 2010 WPI Inflation estimated to moderate to 5.5% by March 2011 Provisioning requirement for sub-standard unsecured infrastructure exposures reduced to 15% from 20% Contd..

3. Highlights.. Policy stance is to support “non-disruptive” growth in demand for credit while anchoring inflation expectations To maintain an interest rate regime consistent with price, output and financial stability Banks‟ investments in Non-SLR Bonds of infrastructure companies with residual maturity of more than 7 years allowed to be classified under HTM (Hold To Maturity)category” Scheduled Commercial Banks and Non Bank Finance Companies with networth more than Rs. 10 billion to migrate to IFRS converged Accounting Standards by April 2013 Discussion paper on mode of presence of foreign banks to be brought by September 2010 Discussion paper on guidelines for new bank to by end July 2010

4. Few Important Updates RBI continues with monetary tightening: CRR, Repo and Reverse Repo hiked by 25 bps each The RBI has hiked the Cash Reserve Ratio (CRR) by 25 bps to 6.00% with effect from April 24, 2010 and thereby removing excess liquidity of about Rs. 125 billion. Earlier in January 2010, the RBI had hiked CRR by 75 bps (50 basis points effective fortnight beginning February 13, 2010, and another 25 basis points effective fortnight beginning February 27, 2010). In addition the RBI has also raised the Repo and Reverse Repo rates by 25 basis points each to 5.25% and 3.75% respectively with immediate effect. The RBI had raised the Repo and Reverse Repo rates by 25 bps each in March 2010 as well. Contd..

5. Few Important Updates Contd.. GDP Growth Target Forecast at 8% The RBI has placed its baseline estimate for real growth for the Indian economy for 2010-11 at 8% with an upside bias. The Annual Policy indicates that the RBI believes that the recovery in economic growth is consolidating and that growth is expected to accelerate from around 7.2-7.5% in 2009-10 to 8% in 2010-11, while becoming more broad-based. In particular, the growth rate forecast by the RBI assumes a normal south west monsoon in 2010, which remains a critical determinant of the domestic economic growth.

6. Few Important Updates Contd.. Baseline inflation forecast at 5.5% by March 2011 Against the backdrop of the reassuring prospects of Indian economic growth, the sharp rise in the wholesale price index (WPI) inflation since September 2009, exceeding the target of 8.5% for March 2010 set by the RBI, and the generalisation of persistently high food inflation into core inflation in recent months has emerged as the key concern. The RBI expects that a return of pricing power as well as the re-emergence of capacity constraints with a strengthening of demand in the near term would exert further pressure on inflation. Accordingly, the RBI has indicated its policy stance towards anchoring inflationary expectations, while “being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures”.

7. Few Important Updates Overall, the RBI anticipates a softening of inflation by mid-2010, from the 9.9% WPI inflation seen in March 2010 and has indicated a baseline projection of 5.5% inflation for March 2011, basing its forecasts on a favourable monsoon in 2010. The RBI maintained its stance to “condition and contain perception of inflation” around 4.0-4.5% while maintain a medium-term objective of 3.0% inflation. Contd..

8. Few Important Updates IFRS Converged Accounting Standards to be mandatory from Apr-2013 As per the roadmap for convergence of Indian Accounting Standards (IAS) with International Financial Reporting Standards (IFRS) for banking companies and Non-Banking Financial Companies (NBFCs), all Scheduled Banks, Urban Cooperative Banks (UCBs) with a networth in excess of Rs. 3 billion and NBFCs which are part of the Nifty or Sensex or have a networth of more than Rs. 10 billion are required to adopt the new accounting standards from fiscal 2013-14. UCBs having a networth of more than Rs. 2 billion, listed NBFCs and NBFCs having a networth of more than Rs. 5 billion are required to adopt the new standards from fiscal 2014-15. The rest of the other UCBs and NBFCs have been exempted from adopting the new standards. Contd..

9. Few Important Updates Lower provisioning for sub-standard unsecured infrastructure accounts In order to meet the increasing financing needs of the infrastructure sector, the provisioning requirement for banks‟ unsecured infrastructure exposures has been reduced from 20% to 15%, subject to banks having an appropriate escrow mechanism in place. Further, RBI has also allowed annuities under Build-Operate-Transfer (BoT) model in respect of road/highway projects and toll collection rights, where the project sponsor has the right to be compensated for lower traffic levels, as tangible security for the purpose of classifying an advance as secured loan. Contd..

10. Few Important Updates Introduction of Bank Holding Companies to be re-explored RBI had explored a framework for Bank Holding Companies (BHC) / Financial Holding Companies (FHC) in August 2007. The plans were shelved after a committee constituted for this purpose considered the structure prevalent in the United States to be highly risky in the Indian context. The RBI plans to constitute a joint working group along with GoI, SEBI, IRDA and IBA to recommend a roadmap for introduction of a holding company structure and the legislative framework. Contd..

11. Few Important Updates RBI continues to broaden the financial market space With a view to further deepen the financial markets in India, the RBI continues to introduce new products. Interest Rate Futures (IRF) based on the 5-year and 2-year notional coupon bearing Government Securities to be introduced; IRFs based on 10-year G-Secs already in place since August 2009 Final guidelines for regulation of short term non-convertible debentures likely by end-June 2010 Draft report for introduction of Credit Default Swaps likely by end-July 2010 Final Guidelines for OTC foreign exchange derivatives to be issued by end-June 2010 Exchange traded currency options on spot US Dollar / Rupee exchange rate to be permitted in addition to the existing currency futures Contd..

12. Few Important Updates The guidelines on Separate Trading for Registered Interest and Principal of Securities (STRIPS), which came into effect on April 1, 2010, to enable market participants to strip/reconstitute eligible Government of India dated securities To facilitate settlement of secondary market trades in corporate bonds, the National Securities Clearing Corporation Limited (NSCCL) and the Indian Clearing Corporation Limited (ICCL) have been permitted to maintain transitory pooling accounts with the Reserve Bank. To facilitate the development of an active repo market in corporate bonds, the guidelines for repo transactions in listed corporate debt securities rated ‘AA’ or above were issued on January 8, 2010 which came into effect from March 1, 2010. Contd..

13. Few Important Updates The following supervisory and regulatory measures have also been introduced Banks have been allowed to classify investments in non-SLR bonds of infrastructure companies having a residual maturity of more than 7 years under the HTM category Investment in non-SLR debt securities proposed to be listed to be treated on par with listed securities for the purpose of computing the investment cap of 10% in unlisted securities Reporting platform for secondary market transactions in Certificate of Deposits (CDs) and Commercial Paper (CPs) to be introduced To setup a working group to work out a reporting mechanism for OTC derivatives Supervisory Review and Evaluation Process (SREP) under Pillar II of the Basel II framework to be included as part of RBI’s Annual Financial Inspection (AFI)

14. Conclusion RBI expects the economic growth to accelerate and become broad-based, thus the RBI’s policy stance has shifted to controlling the prevailing high inflation rates and anchoring the inflation expectations without limiting the credit availability to either the public or private sector. RBI is also taking steps to broaden the financial markets in India while simultaneously attempting to strengthen the stability of financial system in the country