Friday, August 8, 2008

After Effects of RBI's Credit Policy

The Governor of the Reserve Bank Of India, Mr Y. V. Reddy announced its Credit Policy on 29.07.2008.Two measures were taken :-

1) Repo Rate - that is the rate at which the RBI lend funds to Banks, have been increased from 8.5 % to 9%

2) The Cash Reserve Ratio (CRR) - that is the proportion of their deposits that Banks have set aside with the RBI has been increased from 8.75 % to 9%

The First Measure will make the Loans expensive. The expansion plans of the Industries will be hampered. For an ordinary person, it will increase the EMI (Equated Monthly Instalment) payments of the Housing Loans, taken by mortgaging properties on Floating Rates of Interest. The immediate impact of this will be lower demand for Consumer Loans. Also the booming Retail Financing will stop.

The Second Measure will squeeze Liquidity out of the system & will have similar effects. As a consequence of this Monetary Tightening, GDP growth will suffer. The Equity Markets will be in doldrums. Bombay Stock Exchange SensitiveIndex (Sensex) fell from a high of over 21,000 in January 2008 to 14,500 when the RBI's Credit Policy Review was released. There will be no takers for the Initial Public Offers (IPO). Hence RBI's Liquidity Squeeze may have a bigger impact in 2009-2010.These drastic measures will not bear fruits if the crude oil prices rise to $140 per barrel. With General Elections knocking at doors, it is quite normal that the voters will revolt against the rise in prices, when the inflation will exceed their tolerance levels. The result being a change of the Government. Currently HDFC & ICICI have raised their loan rates by 75 basis points. Real Estate prices have fallen. Automobile & 2 Wheeler Companies are slowing down their production. Indian Economy is slowly going down in the ''Quick Sand of the Inflation".


Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

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