Reserve Bank keeps key interest rates unchanged.

>> Friday, October 24, 2008

The Reserve Bank of India (RBI) credit policy did not announce any reduction in key lending rates, dimming the hopes of further infusion of any liquidity. Bankers say RBI may be waiting to see the action that the US Federal Reserve will take when it meets on October 29 and subsequently, European Central Bank, on November 3.

Bankers say that the credit policy was on expected lines as RBI had exhausted most of its ammunition in the form of a steep 250 basis point CRR cut and a 100 basis point cut in repo rate. They would rather wait and see how these measures pan out to solve the credit crisis before further cuts come in.

B A Prabhakar, executive director, Bank of India (BoI), says "the policy is on expected line. Banks, however, expected some relaxation on the prudential norms for classification of NPAs, specially for home loans (90-day limit for NPA to be reduced). At this point, RBI perhaps believes it is better not to alter prudential norms for capital adequacy."

Importers are also now allowed to borrow at higher cost from overseas.

Trade credits for importers to borrow overseas have been hiked to 200 basis points above six month LIBOR for short term loans upto one year.

N S Venkatesh, managing director and CEO of IDBI Gilts, says "RBI is moving in sync with the unfolding crisis. They have been pro-actively and swiftly managing the crisis at every stage. It may now be waiting to see what central banks, like the US Federal Reserve does before relaxing rates further.

Also, oil marketing and shipping companies will be allowed to hedge freight risk apart from the commodities risk allowed until now. In respect of other customers who are exposed to freight risk, AD banks may approach the central bank for permission on behalf of customers.

To contain the possibility of any systemic risks, a special working group has been constituted, with representatives from the RBI, banks and credit rating agencies which is expected to submit its report within three months. The group will study various types of trusts/SPVs set up by banks, management control by parent banks, related regulatory/supervisory issues and recommend a suitable supervisory framework.

Mohan Shenoi, treasurer, Kotak Mahindra Bank, said, "RBI has not ruled out any possibility of CRR cuts in future. If need arises they will review their stance and might adopt some conventional and unconventional measures to infuse liquidity. But the interest rates as of now have to remain unchanged and the bank will take at least 2 weeks to review the global and domestic conditions before easing the rates."

Source: - MyDigitalFC

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