RBI expects slowdown in growth
Moderates GDP Target At 8-8.5%, Increases CRR To Tame Price Rise Mumbai: In its bid to curb inflation, RBI on Tuesday raised the cash reserve ratio (CRR) by 25 basis points, the proportion of deposits banks need to keep with the central bank, to 8.25%, in its annual credit policy review. Though the move came as a surprise as RBI has hiked CRR on April 17 by 50 basis points. Analysts had expected the RBI governor Y V Reddy to increase the repo rate, the rate at which central bank borrows from other banks. The reverse repo rate and the bank rate were left untouched. The RBI expects some slowdown in the growth momentum, setting a GDP growth target of 8-8.5% for 2008-2009 against a target of 8.5% in the 2007-08 fiscal. It is also expecting inflation at a slightly higher 5.5% aganist itsearlier projection of 5%. Reddy told reporters that the danger of global recession has increased and domestic growth prospects have been trimmed due to inflation risks. “There is a greater inflationary pressure than what we expected. As far as growth is concerned, moderation is more or less on expected lines, global uncertainties have increased and there are a number of adverse factors in play,” said Reddy. “The global inflationary pressures have intensified and more importantly, the policies are responding to the immediate problems of financial markets in advanced countries and some of these measures taken in the interest of financial stability at the shorter end, may work against price stability,” he added. When asked why a 5.5% rate of inflation is acceptable when that in developed nations is between 2-3%, Reddy said, “What is realistic is different from what is acceptable. So in our policy also, we have very clearly indicated that if we want successful, optimal global integration, we should go towards inflation of 3%. I think as a goal that is stated in the policy itself, but to reach 3% so many other things had to happen and that is what we are trying.” In other policy measures the limit of bank loans for housing was enhanced from Rs 20 lakh to Rs 30 lakh for applicability of reduced risk weights at 50%, which analysts said is a positive move. This means that banks will have to provision only 50% as security for loans upto 30 lakhs as against 75% earlier. “The move may partly help in addressing slowdown in housing loan disbursements. An important local factor that might have been taken into consideration in this policy change has been the increase in the average ticket size on home loans that has taken place in the last couple of years, given the rising property prices,” said Crisil. If housing loans below Rs 3 lakh were to be treated as part of priority sector lending, then it would provide a boost to the sector and would reduce pressure on banks to originate or buy priority sector loans, said analysts.