The Hindu Business Line : Credit Policy View

The RBI has shown a firm resolve in its fight against the monster of inflation by increasing repo rate by 50 bps to 9 per cent and Cash Reserve ratio by 25 bps to 9 per cent. The central bank has upped its inflation target for FY09 to 7 per cent and we expect more upward revisions over the next few months. The RBI is rightly concerned that sticky commodity prices, expansionary fiscal policy and loose money supply could result in serious build up in long term inflationary e xpectations. There are visible signs of moderation in economic growth and some softening in global commodity prices; however, price stability seems to be the main priority for the central bank at the moment. Trends in monsoon and sowing pattern so far has not been very encouraging and there is possibility of spike in prices of some of the food items. The global situation remains fluid and the RBI should continue to tread a cautious path.

We maintain a bearish view on bond market and expect yields to inch up further. We expect liquidity conditions to tighten significantly and macro economic environment to deteriorate. Therefore we continue to advice investors a cautious approach towards duration and credit risk. In the current environment, “pleasure is all about avoiding pain.”

Navneet Munot Executive Director, Morgan Stanley Mutual

Check on credit expansion

It appears that the policy is not comfortable in seeing the overall growth momentum in credit growth of banking system and monetary growth. A 50 basis point hike in repo rate and 25 basis point hike in CRR is clearly targeted towards slowing down the economy as well as keep a check on rising inflation. The RBI has also warned the need for close monitoring of credit expansion which essentially means either slowing the credit offtake or increasing the cost of funds for low c redit quality borrowers. This, in all probability is being highlighted keeping in the mind the need to adhere to Basel II norms in the year 2009. Post policy, there is a possibility of further hike in interest rate which in turn would put a check on capital expansion and consumer spending.

The overall liquidity situation would remain tight in the near term and short term interest rates are expected to remain in double digit. While inflation may start descending on account of the monetary tightening, larger than budgeted borrowing by the Government shall restrain substantial fall in long term rates. However, by Q4 FY09, the longer end of the curve may begin to factor in the slow down leading to an inverted yield curve. Overall, the environment could remain hawkish for both interest rate and credit; thus, the need for caution remains.

A. Balasubramanian Chief Investment Officer, Birla Sun Life AMC

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