RBI's Annual Policy: The key short-term Interest Rates are kept unchanged in the RBI's Annual Policy announcement for the year 2006-07. The Central Bank expects Economic Growth to remain at current level and is confident that inflation can be contained below the target rate.
The RBI's Annual Policy announcement to keep Interest Rates steady has surprised the markets. Majority of economists and analysts were expecting the central bank to raise reverse repo rates by 25 basis points in the light of rising global interest rates and higher crude oil prices.
The Central Government is in favor of stable interest rates as it does not want to upset the Economic Growth momentum.
Bonds have gained after the announcement while the Rupee is holding steady.
Outlook
There are no major changes in RBI's economic and RBI's Annual Policy outlook for the current year. GDP Growth projection for the current year has been maintained at close to 8 per cent. Target inflation has also been left unchanged, despite the fact that current Inflation is lower than earlier forecasts.
Easing the Liquidity Crunch
The Banking Sector has been complaining about tight liquidity conditions for some time now. Credit demand, both from the Corporate And Retail Segments, has been growing at a record pace for the last many months. However, growth in deposits has not kept pace as other asset classes offered superior returns for Retail Investors.
Housing And Personal Loans may cost more
It is very likely that Commercial Banks would pass on the higher provisioning requirements through a modest rate hike on housing and Commercial Real Estate Lending Rates. Rates on Housing Loans above Rs20 lakhs would rise.
Highlights of RBI's Annual Policy
- Reverse Repo Rate, the rate at which the RBI borrows money from the market, unchanged at 5.5 per cent per annum.
- Repo Rate, the rate at which the central bank lends money, stays the same at 6.5 per cent.
- Bank Rate, more of a reference rate for fixing interest rates on medium and long term commercial borrowing, unchanged at 6 per cent per annum.
- Cash Reserve Ratio (CRR) for Commercial Banks also remains the same at 5 per cent.
- GDP growth forecast for 2006-07 at between 7.5 per cent and 8 per cent
- Target inflation range for 2006-07 at 5 to 5.5 per cent
- Credit Growth forecast to slow down to 20 per cent from 30 per cent at present
- Bank deposits to grow by Rs3.3 lakh crore this year
- Tightens risk control measures for banks' exposure to Real Estate and Capital Market sectors
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