Changes in Key Interest Rates
RBI increased repo and reverse repo rates by 50 basis points each from 6.75 percent to 7.25
percent and 5.75 percent to 6.25 percent respectively. Meanwhile CRR, SLR and Bank Rate have
been retained to their existing levels.
Policy Rate Change Effective Rate
CRR Unchanged 6.0%
Repo rate +50 basis point 7.25%
Reverse Repo rate +50 basis point 6.25%
Bank rate Unchanged 6.0%
As per RBI the expected outcomes of the actions are:
To control the demand side inflationary pressures and to minimize risk to growth.
To sustain growth in the medium term and to maintain an interest rate regime
consistent with price, output and financial stability.
Some of the key highlights of the policy are:
RBI Policy shifted to single rate regime. There will be only one independently varying
policy rate which will be the repo rate. The reverse repo rate will continue to be
operative but it will be pegged at a fixed 100 bps point below the repo rate. This
indicates that with every hike in repo rate reverse repo rate will be automatically
increased to the same extent. We believe that this move is expected to reduce the
volatility in the short term rates.
RBI has increased the savings bank deposit interest rate from current 3.5% to 4.0% with
an immediate effect. The increase in savings banks rate will increase the bank’s cost of
funds which will impact the banks’ NIMs by 10‐12 bps on an average (depending on the
proportion of savings a/c in total deposits). Banks will have to pass on the increase in
cost to its customers in order to minimize the impact.
RBI has projected FY12 GDP growth to be in the range of 7.4‐8.5%. Finance Ministry in
its economic survey had mentioned that GDP growth will be around 9% for FY12. The
current RBI projection is way below the Finance Ministry estimate.
Banks credit growth is projected to be at 19% and deposit growth to be at 17% for FY12
as against credit growth of 21% in FY11. This indicates a slowdown in credit off take of
the banks.
RBI has projected FY12 money supply growth at 16%.
Investment in debt mutual funds will be subject to a cap of 10% of the net worth as on
March 31 2010. However, banks which already have investments in excess to 10% will
be allowed an extension of 6 months to comply with this requirement.
WPI inflation has been projected at 6.0% for FY12 with an upward bias. However, RBI
added that inflation will remain elevated in H1FY12 (approximately 9% factoring in fuel
price hikes) before it starts to gradually cool down in second half.
RBI has proposed to enhance the provisioning requirements on certain NPAs and
restructured advances. Higher provisioning will impact the profitability of the bank
especially the banks with lower Provision Coverage Ratio (PCR) like SBI and Dena Bank
and higher restructured assets like IDBI Bank and ICICI Bank.
Provisioning on banks' secured portion of loans has been increased as follows:
Existing Proposed
Substandard loan provisioning 10% 15%
Upto 1 year 20% 25%
1‐3 years 30% 40%
Moreover, additional 10% provision has to be made on unsecured sub‐standard loans
and 2% provision on restructured loans in standard assets for first 2 years.
RBI mentioned that it would adhere to begin BASEL‐III implementation from January
2013 and is preparing norms for internal rating under Basel‐III for banks.
RBI further indicated that bank loans to micro finance companies from April 1 2011
onwards will be considered as priority sector only if the prescribed percentage of their
total assets are in the nature of "qualifying assets" and they adhere to the "pricing of
interest" guidelines to be issued.
According to RBI global recovery is expected to continue in 2011. However, growth is
expected to slow down marginally from its pace in 2010. Growth is projected to
decelerate in advanced economies due to weakening of the effects of fiscal stimuli, high
oil prices and other rising commodity prices.
Growth in Emerging Market Economies is also expected to decelerate on account of
monetary tightening and rising commodity prices.
