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Annual Credit Policy: RBI keeps all rates intact news
24 April 2007

Mumbai: In its credit policy for 2007-08, the Reserve Bank of India has kept all the interest rates unchanged to sustain the investment boom.

The RBI has lowered its growth forecast to 8.5 per cent from 8.5-9 per cent as it expects global GDP to decline in 2007. Inflation targets have also been revised downward to 5 per cent from last year's targets of 5-5.5 per cent and RBI's medium term inflationary target is now 4-4.5 per cent.

The RBI has also announced important operational tools for moving towards capital account convertibility. Among them Indian companies can invest in foreign companies upto 300 per cent of their net worth, hedging for individuals and remittances up to $100,000 v/s. USD 50,000 earlier.

Domestic producers and users will also be allowed to hedge their price risk on international commodity exchanges for copper, aluminia, zinc, and even aviation turbine fuel. Indian companies will also be allowed to rebook and cancel their forward contracts.

Highlights of Credit Policy 2007-08:
The RBI is looking at a GDP growth of 8.5 per cent assuming no oil, domestic shocks for the FY08, while it is aiming to keep the inflation target for FY08 at 5 per cent as against 5.5 per cent for FY07, whereas the medium term inflation target has been set at 4-4.5 per cent

  • The GDP forecast has been lowered on expected decline in global GDP growth
  • The target money supply growth is set at 17-17.5 per cent for FY08 v/s 15 per cent for FY07. The growth in aggregate deposits stood at Rs4.9 lakh crore.
  • The risk weight for housing loan up to Rs20 lakh has been cut to 50 per cent from 75 per cent
  • Infrastructure constraints identified as the single most concern for the economy
  • The RBI aims to curb credit flow to business at at 24-24.5 per cent in the FY08
  • The RBI expressed that the "socially tolerable" rate of inflation has come down
  • It revealed that the bank loans to real estate grew 66.7 per cent till December 2006 and housing loans grew 30 per cent, while those for infrastructure by 21.7 per cent till December 2006
  • The overseas investment limit for Indian companies has been kept up to 300 per cent of their networth, from 200 per cent for FY07. The overseas investment limit for MFs has been raised to $4 billion from $3 billion
  • The interest rate ceiling on foreign currency deposits has been lowered to 75 bps minus the LIBOR rate, whereas the interest rate ceiling on NRE (a) deposits has been lowered by 50 bps to LIBOR
  • The RBI will allow for the repayment of ECBs (external commercial borrowings) up to $400 million v/s $300 million without prior approval
  • The listed companies can invest overseas up to 35 per cent of their net worth vs 25 per cent earlier
  • The non-food credit growth forecast is set at 24-25 per cent in FY08 vs 29 per cent in the last 3 years.
  • The FY08 trade and current account deficits have been seen at the same level as in FY07
  • Individuals can book forward contracts up to $100,000 annually, up from $50,000
  • The RBI believes that the financial sector warrants use of prudential tools in support of monetary policy
  • The RBI aims to facilitate dynamic forex hedging by individuals. The domestic producers/users have been allowed to hedge price risk on internal commodity exchanges. Hedging price risk will be allowed for aviation turbine fuel (ATF), aluminum, copper, lead, nickel, zinc, etc
  • The forward contract limits for exporters & importers have been hiked to 75 per cent from 50 per cent. Companies can cancel & rebook forward contracts for hedging overseas equity investments. SME's can cancel & rebook forward contracts too
  • Listed companies can make portfolio investments abroad up to 35 per cent of net worth v/s 25 per cent earlier
  • BPOs setting up call centers abroad can remit cost of equipment
  • The RBI intends to introduce non-competitive bidding for state government loan auctions. It also mulls re-issuance of state government securities
  • The RBI believes that Repos in corporate bonds after trading platform in corporate bonds stabilize. The base rate for new floating rate bonds will be average yield in last 3 182-day T-bill auctions
  • The risk weights for loans up to Rs1 lakh against gold and silver have been reduced to 50 per cent v/s 125 per cent earlier
  • Rural reconstruction banks will be allowed corporate agencies for distribution of all insurance products
  • The RBI plans to introduce credit guarantee schemes for distressed farmers
  • The interest rate ceiling on deposits paid by NBFC's has been raised to 12.5 per cent from 11 per cent
also see : Credit policy driven by concern for price stability
Full text of Annual Policy Statement for 2007-08
Macroeconomic and Monetary Developments 2006-07

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Annual Credit Policy: RBI keeps all rates intact