Funds sell record Rs22,271 crore of debt in Oct

Mumbai: Indian mutual funds sold debt worth Rs22,271 crore in the first three weeks of October because investors are reluctant to infuse fresh money to replenish outflows caused by a surge of redemptions in a volatile market.

Analysts say the measures taken by the Reserve Bank of India (RBI) to ease a cash and credit crunch will take time to soothe the Rs5.29 trillion mutual fund industry, but inflows should return soon with the overnight inter-bank money market rate declining to around 6.5% from around 20% at the peak.
Higher call rates encourage investors in debt funds, particularly banks, to withdraw money from mutual funds and lend in the overnight call money market to earn more.
RBI has cut its policy rate by 100 basis points and banks’ cash reserve ratio (CRR), or the proportion of deposits that banks need to keep with the central bank, by 250 basis points to release Rs1 trillion into the banking system. One basis point is one-hundredth of a percentage point. Besides, it also created a Rs20,000 crore liquidity window for mutual funds.
So far, mutual funds have drawn only Rs8,800 crore from this window. On Friday, there was no taker.

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Liquidity management on top of RBI`s agenda

Liquidity management is expected to top the agenda in the first quarter review of the monetary policy by the Reserve Bank of India (RBI) tomorrow.

The immediate task at hand for the RBI would be to convey whether it is still in the tight monetary policy mode, irrespective of an extended pause in interest rate increases.

Flush liquidity, apart from softening short-term money market rates, poses inflationary risks and also threatens to push credit growth back towards the peak of around 30 per cent witnessed in the previous three years.

The liquidity has been largely on account of the RBI’s purchases of dollars from the market to check the rupee’s sharp rise. Though foreign fund inflows into equities have remained strong, overseas borrowings and foreign direct investment have equally contributed to a glut in inflows.

Read more at Business Standard

RBI hikes CRR rates by 50 basis pts to 7 pc

NEW DELHI: The Reserve Bank Governor Dr Yaga Venugopal Reddy has hiked cash reserve ratio by 50 basis points to 7 per cent while the CRR repo and reverse repo rates as well as the bank rates remain unchanged.

Inflation target for 07-08 remain at 5 per cent according to the first quarter credit policy review unveiled on Tuesday. GDP forecast for FY-08 has been set at 8.5 per cent. The new CRR rate will come into effect from August 04.

The RBI has also removed 3000 crore reverse cap from August 06 The other highlights of the policy are as follows:

• Hedge funds pose significant risks to the markets says credit policy.

• Financial stability to add to market stance says RBI.

• Inflation targeted at 4 to 4.5 % in the medium term. Holding inflation within 5.0 per cent in 2007-08 assumes priority in the policy hierarchy, while reinforcing the medium-term objective to condition policy and perceptions to reduce inflation to 4.0-4.5 per cent on a sustained basis.

• CRR to be used for managing liquidity.

• Domestic outlook was favourable.

• Monetary stance spelt out in February 2007 continues.

• Credit policy guided by domestic policy.

RBI hikes CRR by 50bps, repo by 25bps

The Reserve Bank of India (RBI) today abandoned its monetary policy stance of equal emphasis on price stability and growth, and decided to remain solely focussed on inflation containment. As part of its further monetary tightening, the central bank raised the cash reserve ratio (CRR) for third time since December 2006 by 50 basis points to 6.50% with effect from April 28 and also raised the repo rate by 25 basis points to 7.75%, the rate at which it lends to banks against securities. “The stance of monetary policy has progressively shifted from an equal emphasis on price stability along with growth, to one of reinforcing price stability with immediate monetary measures, and to take recourse to all possible measures promptly in response to evolving circumstances,” RBI said. RBI MOVES AGAINST INFLATION Date Action March 30, 2007 CRR hiked by 50 bps to 6.5%; Repo rate hiked by 25 bps to 7.75% Feb 14, 2007 CRR hiked by 50 bps to 6% Jan 31, 2007 Repo rate hiked by 25 bps to 7.5% Jan 31, 2007 General provisioning on standard commercial real estate loans, personal loans & capital market loans doubled to 2% Dec 11, 2006 CRR hiked by 50 bps to 5.5% Oct 31, 2006 Repo rate raised by 25 bps to 7.25% July 25, 2006 Reverse repo and repo rates hikes 25 bps each to 6% and 7% respectively June 8, 2006 RBI raises reverse repo and repo rates by 25 bps to 5.75% and 6.75%, respectively The central bank’s monetary tightening measures came even as the banking system was reeling under severe liquidity strain, with call rates having in recent days shot up to ridiculously high rates of 70-80% and year-on-year inflation at around 6.5% for the third week in succession up to March 17, 2007. Since the February 13 measures, when CRR was raised by 50 basis points, RBI said data has shown that industrial production increased by 11% during April 2006-January 2007 as against 8% a year earlier and the year-on-year money supply (M3) growth up to March 16, 2007 was 22% as against 16.9% a year ago. At a disaggregated level, prices of primary articles, fuel group and manufactured products registered a year-on-year increase of 12%, 1% and 6.6% as on March 17, 2007 as against 3.7%, 8.9% and 1.7% a year ago. The year-on-year growth in non-food bank credit of scheduled commercial banks (SCBs) was 29.5% as on March 16, 2007 as against 32.7% a year ago. The third increase in CRR in five months will drain Rs 43,000 crore from the banking system. The RBI has also reduced the interest it will pay on CRR balances to 0.50% from 1%. The RBI release issued this evening:

In the recent period, monetary policy has been engaged in managing the transition to a higher growth path while ensuring that pressures on actual inflation and inflation expectations are contained. At this juncture, it is important to reinforce the measures already taken for maintaining price stability and anchoring inflation expectations in order to sustain the growth momentum. The role of monetary policy is to maintain stability and so contribute to growth on an enduring basis.

As indicated in the Third Quarter Review of the Annual Statement on Monetary Policy for the year 2006-07, "the outlook for inflation assumes criticality in terms of policy monitoring and action" (paragraph 76). Furthermore, "a judicious balancing of weights assigned to monetary policy objectives would accord priority to stability in order to support growth on a sustained basis" (paragraph 82). Accordingly, it is necessary to reinforce the emphasis on price stability and well-anchored inflation expectations, as set out in the stance of the Third Quarter Review, with a demonstrated commitment in terms of credible policy monitoring and actions. The conduct of monetary policy should continue to demonstrate that inflation beyond the tolerance threshold of the Reserve Bank is unacceptable and that the resolve to ensure price stability is always backed by timely and appropriate policy responses.

In recognition of the cumulative and lagged effects of monetary policy, the Reserve Bank began a graduated withdrawal of accommodation in mid-2004. Since September, 2004 repo/reverse repo rates have been increased by 150 basis points each, the CRR has been raised by 100 basis points, risk weights have been raised in the case of housing loans (from 50 per cent to 75 per cent), commercial real estate (from 100 per cent to 150 per cent) and consumer credit (from 100 per cent to 125 per cent) and general provisioning requirement for standard advances in specific sectors has been raised to 1.0 per cent of standard advances. On February 13, 2007 a further two-stage increase of 25 basis points each in the CRR was announced, effective from the fortnights beginning February 17 and March 3, 2007. Liquidity management was modified on March 2, 2007 to put in place an augmented programme of issuance under the market stabilisation scheme (MSS) with a mix of treasury bills and dated securities in a more flexible manner. In view of the enhanced MSS programme and the need to conduct LAF as a facility for equilibrating very short-term mismatches, daily reverse repo absorptions were limited to a maximum of Rs.3,000 crore, effective March 5, 2007. The stance of monetary policy has progressively shifted from an equal emphasis on price stability along with growth to one of reinforcing price stability with immediate monetary measures and to take recourse to all possible measures promptly in response to evolving circumstances

Since the monetary measures that were announced on February 13, 2007 there have been some notable developments, namely,

(a) The general index of industrial production increased by 11.0 per cent during April 2006 to January 2007 as against 8.0 per cent a year ago, as per the release of the Central Statistical Organisation (CSO) of March 12, 2007.

(b) Year-on-year inflation based on the wholesale price index (WPI), has ruled around 6.5 per cent for the third week in succession up to March 17, 2007 as per the data released today. At a disaggregated level, prices of primary articles, fuel group and manufactured products registered a year-on-year increase of 12.0 per cent, 1.0 per cent and 6.6 per cent as on March 17, 2007 as against 3.7 per cent, 8.9 per cent and 1.7 per cent a year ago.

(c) inflation based on the consumer price index for industrial workers (CPI-IW), urban non-manual employees (CPI-UNME), agricultural labourers (CPI-AL) and rural labourers (CPI-RL) showed year-on-year increase to 7.6 per cent, 7.8 per cent, 9.8 per cent and 9.5 per cent in February 2007, respectively, from 5.0 per cent, 4.8 per cent and 5.0 per cent and 4.7 per cent, a year ago.

(d) The year-on-year growth in non-food bank credit of scheduled commercial banks (SCBs) was 29.5 per cent as on March 16, 2007 as against 32.7 per cent a year ago.

(e) The year-on-year growth in aggregate deposits of SCBs was 24.8 per cent as on March 16, 2007, over and above 18.0 per cent a year ago.

(f) The year-on-year money supply (M3) growth up to March 16, 2007 was 22.0 per cent as against 16.9 per cent a year ago.

(g) Continuation of accelerated external inflows has resulted in accretion of US $ 18.6 billion to the foreign exchange reserves, taking their level from US $ 179.1 billion at the end of January, 2007 to US $ 197.7 billion on March 23, 2007.

(h) Additional liquidity amounting to Rs.23,894 crore was absorbed under the market stabilisation scheme (MSS) during February 1 - March 30, 2007.

(i) Globally, the process of withdrawal of accommodation in monetary policy is being vigorously pursued. Since mid-February, 2007 among the leading central banks, the European Central Bank and the Bank of Japan have raised key policy rates by 25 basis points each, while the People’s Bank of China raised one year lending rates by 27 basis points and the reserve requirements by 50 basis points. There has been no change in the policy rates of the US Federal Reserve, the Bank of England, the Bank of Canada, the Reserve Bank of Australia and the Reserve Bank of New Zealand all of which had undertaken prior policy action.

In the light of the current macroeconomic, monetary and anticipated liquidity conditions, and with a view to containing inflation expectations, it is critical to take demonstrable and determined action on an urgent basis. Accordingly, the following monetary measures are being taken consistent with the stance of the monetary policy:

i) It has been decided to increase the fixed repo rate under the LAF by 25 basis points from 7.50 per cent to 7.75 per cent with immediate effect.

ii) The other arrangements regarding the operations of LAF announced on March 2, 2007 will continue until further notice.

iii) The policy of withdrawal of semi-durable and durable elements of liquidity through treasury bills and dated securities under MSS will continue. Accordingly, the Reserve Bank would, subject to variations in liquidity conditions, announce auctions of MSS covering issuances of treasury bills and dated securities on a weekly basis. The auction for Treasury bills under MSS would continue to take place by notifying the amounts under MSS every week along with the regular auction calendar as has been the existing practice. The Reserve Bank would retain the flexibility of reviewing the schedule of auctions under the MSS from time to time, in response to evolving circumstances.

iv) The cash reserve ratio (CRR) of scheduled commercial banks (SCBs), regional rural banks (RRBs), scheduled co-operative banks and scheduled primary (urban) co-operative banks is being increased by one-half of one percentage point of their net demand and time liabilities (NDTL) in two stages, effective from the fortnights indicated below:

Effective Date (i.e., the fortnight beginning from) CRR on net demand and time liabilities (per cent)

April 14, 2007 6.25%

April 28, 2007 6.50%

As a result of the above increase in the CRR, an amount of Rs.15,500 crore of resources of banks would be absorbed.

v) The interest rate applicable on eligible CRR balances (i.e., the amount of reserves between the statutory minimum CRR and the CRR prescribed by the RBI) shall be reduced to 0.5 per cent per annum from the present 1.0 per cent per annum with effect from the fortnight beginning April 14, 2007.

Active monitoring of macroeconomic, overall monetary and liquidity conditions will continue and all monetary policy actions would be considered in response to the evolving situation.