Third-Quarter Review of the Annual Policy Statement for 2007-08
Monetary Measures:
· Bank Rate kept unchanged at 6.00%.
· The reverse repo rate and the repo rate under the
· The Reserve Bank retains the option to conduct overnight or longer term repo/reverse repo under the
· CRR kept unchanged at 7.50%.
Other Highlights:
· Real
· Inflation, based on variations in the wholesale price index (WPI) on a year-on-year basis, eased to 3.80% as on January 12, 2008 from its peak of 6.40% at the beginning of the financial year and from 6.20% a year ago. Prices of primary articles registered a year-on-year increase of 3.90% as on January 12, 2008 as compared with 9.50% a year ago.
· Growth in broad money (M3), year-on-year (y-o-y), was 22.40% on January 4, 2008 as compared with 20.80% a year ago. Non-food credit by scheduled commercial banks moderated to 22.20%, y-o-y, as on January 4, 2008 from 31.90% a year ago
· There has been some improvement in the finances of the Central Government as the gross fiscal deficit has declined indicating that adherence to the Fiscal Responsibility and Budget Management (FRBM) rules in the current financial year is on track.
Stance of Monetary Policy
· The projection of overall real
· The policy endeavor would be to contain inflation close to 5.00% in 2007-08 while conditioning expectations in the range of 4.00-4.50% so that an inflation rate of around 3.00% becomes a medium-term objective.
· The rate of money supply has picked up coincident with a jump in the growth of reserve money, driven by the accretion to the Reserve Bank's foreign exchange assets. Moderating money supply in alignment with the indicative projections of 17.00-17.50% set out in the Annual Policy Statement of April 2007 may warrant appropriate responses, given the considerations for ensuring macroeconomic and financial stability going forward.
· The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations (OMO) including the MSS and the LAF, using all the policy instruments at its disposal flexibly, as and when the situation warrants.
· Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for growth and inflation, the overall stance of monetary policy in the period ahead will broadly continue to be:
o To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment conducive to continuation of the growth momentum and orderly conditions in financial markets.
o To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion.
o To monitor the evolving heightened global uncertainties and domestic situation impinging on inflation expectations, financial stability and growth momentum in order to respond swiftly with both conventional and unconventional measures, as appropriate.
The markets were expecting a rate cut by RBI which did not take place. This has resulted in hardening of bond yields which would be an opportunity to invest in them. However the overall stance of the monetary policy is neutral for the debt markets. As expected RBI sounded caution on the high money supply growth and inflationary expectations due to the high oil and agricultural prices. The growth in Money Supply was mainly on account of the forex reserves buildup in the last 1 year. Any slowdown in the reserves buildup would be a positive for the markets.
We continue to recommend investing in Income funds for a 1 year plus horizon as we expect yields to ease from the current levels. For 6 months to 1 year perspective, investments in short term bond funds are recommended. Liquid Plus funds are recommended for conservative investors with a 3-6 months horizon as they would be able to provide higher accrual income on the portfolio.
Source- HDFC
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