The Reserve Bank of India in its second quarter review has left key rates unchanged, but signaled a move toward a tighter monetary policy by hiking the statutory liquidity ratio and increasing the provisioning norms for advances to commercial real estate sector. The central bank has kept its reverse repo rates and repo rate unchanged at 3.25 per cent and at 4.75 per cent respectively. Reverse repo rate is the rate at which the RBI borrows money from banks while repo rate is the rate at which our banks borrow rupees from the central bank.

The hike in SLR will not impact liquidity, the RBI said. SLR is the minimum percentage of deposits that banks have to park in assets like government bonds.

Keki Mistry, MD of HDFC, said that hike in SLR signals that some degree of monetary tightening may happen in the future but for now the central bank would focus on supporting the growth process. SLR has historically been at 25 per cent and banks are currently holding bonds beyond this limit, he said. So the SLR hike will not impact liquidity but is a signal that the tightening process might happen in the future, he added.

However, the RBI has raised FY10 inflation forecast to 6.5 per cent vs earlier estimate of 6 per cent.

Surjit S Bhalla, managing director of Oxus Research and Investments, said, the RBI is recognising correctly that rate hike could not combat food inflation. He expects the RBI to continue this policy stance for a while.

In a move that could have a bearing on the realty sector, the RBI increased the provisioning requirement for advances to the commercial real estate sector classified as standard assets, from the present level of 0.40 per cent to 1 per cent. “In view of large increase in credit to the commercial real estate sector over the last one year and the extent of restructured advances in this sector, it would be prudent to build cushion against likely non-performing assets,” the central bank said.

The bank also tightened the non-performing assets norms for banks. The RBI said, it would “advise banks to augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent. Banks should achieve this norm not later than end-September 2010.”
But the central bank has cut its FY10 credit growth forecast to 18 per cent vs earlier estimate of 20 per cent. The non-food credit growth estimate has been cut to 18 per cent from 20 per cent.

It has also cut its money supply growth estimate to 17 per cent from 18 per cent. In addition, the central bank has cut its export credit finance to 15 per cent from 50 per cent.

The central bank noted that there is a critical need to downsize government borrowing plan to ward off upward pressure on interest rates. In its FY10 GDP forecast, it has kept its forecast unchanged at 6 per cent, with an upside bias.