A balancing act

COMMENT: Kalpana Morparia, CEO, JP Morgan India

The RBI has carried out a balancing act with the latest credit policy, with the twin purposes of sustaining early stage economic recovery and controlling rising inflation. It also reaffirms an expected GDP growth rate of 6 per cent, with an upward bias.

Apart from a 100 bps increase in SLR (no major impact given higher SLR holdings amongst banks), no changes have been made to CRR, repo and reverse repo rates. As expected by the market, the RBI reaffirmed its growth bias, given a 400 bps reduction in CRR and 425 bps reduction in repo rates since October 2008.

A key proposal likely to be implemented by November-end is the introduction of repo eligibility of corporate bonds. This will provide liquidity to the bond market and will help banks manage duration by investing in bonds, rather than making long dated loans, especially in the infrastructure financing space.

While the RBI remains committed to growth, it has also indicated the need for a prudent approach to lending. As such, the RBI has introduced a variety of measures to ensure credit quality and calibrated credit growth. The RBI has directed banks to reach an NPL coverage of at least 70 per cent by September 2010.

This measure may lead to elevated provisioning at certain banks in the short term and ensure that banks are better prepared to face downturns similar to those witnessed earlier this year. Justifiably concerned about rising inflation, the RBI has increased the provisioning on standard loans to real estate companies (to 100 bps from 40 bps), as the RBI sees excess liquidity leaking into asset prices.