Reserve Bank on Tuesday left all key rates unchanged and announced steps that would pave the way for lower interest rates on home loans in its annual credit policy - aimed at sustaining growth without fuelling inflation.
Unveiling the Annual Policy Statement for 2007-08, the Reserve Bank also lowered the growth forecast for 2007-08 to 8.5 per cent and promised to keep the inflation close to 5 per cent, bringing comfort to commoners.
Announcing a feel-good policy, the apex bank Governor YV Reddy took a number of initiatives toward capital account convertibility and encouraging hedging of price risk on global commodity exchanges.
He also put in place measures to develop the corporate bond market, futures contract, establishment of credit information companies and a number of steps to help distressed farmers and micro-finance.
RBI announced that risk weight on the residential housing loans to individuals would be reduced to 50 per cent from 75 per cent as a temporary measure, keeping in view the default experience and other relevant factors.
This step would be applicable to loans up to Rs 20 lakhs and will be reviewed after one year, the policy said.
This measure would leave banks with more money to lend for the housing sector and probably make interest rates attractive for loans up to Rs 20 lakh.
Belying all expectations on monetary tightening, Reddy kept bank rate unchanged at 6 per cent, short term repo rate at 7.75 per cent and cash reserve ratio at 6.5 per cent.
RBI had hiked key short term repo rate five times since June 2006 and Cash Reserve Ratio three times in two tranches since December last in a bid to suck out liquidity to douse inflation, hovering over 6 per cent.
The annual policy, however, expresses confidence to contain inflation close to 5 per cent in 2007-08 and with a medium term policy objective of keeping it in the range of 4 to 4.5 per cent.
"The objective would be conducive for maintaining self accelerating growth over the medium term," Reddy said.
Reserve Bank also reduced to 50 per cent the risk weight for loans by banks up to Rs one lakh against gold and silver ornaments
In a measure aimed at hastening full float of rupee, the central bank provided greater flexibility for prepayment of external commercial borrowings (ECB) by corporates up to $400 million from the present limit of $300 million.
It also liberalised individual remittance scheme by doubling the present cap to $100,000 per financial year.
It is proposed to expand the range of hedging tools available to the market participant and also facilitate dynamic hedging by the residents. The Reserve Bank proposes to include corporate bonds in the repo market after stabilising trading platforms for this purpose and a robust settlement systems.
Following representations from metal producers, the central bank authorised dealer Banks to permit domestic producers and users to hedge the price risk on aluminium, copper, nickel and zinc in global commodity exchanges.
To encourage the blooming aviation industry, the Reserve Bank allowed actual users of aviation turbine fuel to hedge in global commodities market. In the face of fluctuating rupee, exporters and importers have been allowed to hedge their foreign exchange exposures of the goods and services up to 75 per cent.
The apex bank increased the cap on interest rates on NBFC deposit to 12.5 per cent from the present 7 per cent. It will also come out with final guidelines by June 15 for setting up of mortgage guarantee companies for the housing sector.
Reddy said that the overarching policy challenge is to manage the transition to a higher growth path while containing inflationary pressures.
Reddy said that the pace of growth will continue to be supported by steady increase in the gross domestic savings and some improvement in the efficiency of capital use.
However, the capacity expansion could be constrained over the next two years. In the face of inflation and interest rate differential between India and the rest of the world, the Reserve Bank reduced the interest rate ceiling on Foreign Currency Non Resident (B)(FCNR) deposits and Non-Resident External RA (NRE) deposits by 0.5 per cent with immediate effect.
This move may check the surging foreign exchange reserves now at over $200 billion fuelling the surge in liquidity in the system. Faced with the accumulation of surplus cash balances, RBI has stressed on deepening and widening the government securities market.
Following discussions with the state governments, the operational modalities for introduction of an indicative calendar of market borrowing by states are being finalised.
The apex bank is also finalising modalities for extending non competitive bidding by state governments in primary auctions and proposed to introduce a system of re-issuance of state government securities.
Reserve Bank proposes to constitute an internal working group to look into the possibility of achieving full float of rupee by 2008 end.
The High Power Expert committee led by Percy S Mistry on making Mumbai a global financial centre had set 2008 end as target for achieving capital account convertibility as against the earlier recommendation of RBI panel five year time-frame.
The internal working group will examine all the recommendations of the Mistry Committee including capital account convertibility and implement them appropriately.
Reserve Bank said that the stance of the Monetary Policy will be to reinforce emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of growth momentum.
It also re-emphasised credit quality and orderly conditions in financial markets for securing macroeconomic and in particular financial stability while simultaneously pursuing greater credit penetration and financial inclusion.
It will also respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations and the growth momentum.