structural nature of the
food inflation is caused mostly by changing food consumption patterns
Indians, where in Indians are increasingly consuming a high protein
of pulses, milk, eggs, fish and meat. Although, the protein based food
have a weight of 6.4% in the WPI, the level of inflation is very high
items. The inflation for protein based food items peaked in May 2010 at
in September 2010, it was still high at 23.9%
6.0% WPI inflation
target for March 2011 was set when the base year of WPI was 1993-94.
Due to the
change in the base year of WPI from 1993-94 to 2004-05, the RBI has
inflation target for March 2011 to 5.5% from 6.0%.
action: Higher margins from the
borrower, higher provisioning by banks for housing loans
was no regulatory ceiling on the loan
to value (LTV) ratio. This meant that the banks earlier could have
100% of the value of the house, but the banks used to lend only up to
90% of the house value. However, in this monetary policy review, the
decided that the banks can lend only up to 80% of the house value. This
will force the borrower to arrange for the margin money of 20% on his
RBI has taken this step to prevent excessive leveraging by borrowers.
present, for the housing loans with -
this policy review, the RBI has decided that the risk weight will be
all housing loans over Rs. 75 lacs irrespective of LTV.
up to 75% and for loans up to Rs. 30 lakhs,
the risk weight is 50%
over 30 lakhs with LTV up to 75%,the
risk weight is 75%
ratio more than 75 %, the risk weight of
all housing loans, irrespective of the amount of loan, is 100%.
the view that certain banks are offering
teaser rate housing loans wherein, the loans are offered at lower
rates in the first few years after which the loan rates become higher,
proposed to “increase the standard asset provisioning by
commercial banks for
all such loans to 2%”
for the first step,
all the other two steps taken by RBI on housing loans may not have
on the borrower.
The other two steps are
taken with the view to discourage banks to lend housing loans over Rs.
Also, this move would ensure higher provisioning in the bank books for
rate home loans to take care of default by the borrowers when the
rates increase after the first few years. The banks would have to
to pass the burden on the borrowers but, considering the increased
requirements, the banks may not pass on the extra burden to the
sectors like Automobiles, Real Estate and higher risk lending sectors
Aviation, Infrastructure and Capital Goods might face the heat as banks
already started to increase both lending and deposit rates.
the other hand, the
depositors will get higher interest rates on their fixed deposits.
estate sector would also
get affected as the buyers decide to postpone their home purchases if
not able to arrange for the 20% margin money.
this rate hike, the
interest rate differential between the developed economies and India
increased by 25 bps, which may lead to higher inflows by Foreign
Investors (FIIs) into the debt sector. With higher FII inflows, export
dependent sectors like Textiles and IT may also get negatively affected
Rupee may witness appreciation in the short to medium-term due to the
rate hikes were in line
with the market expectations. Although RBI expects the economy to grow
in the current fiscal year, the major domestic cause of worry is
in particular, the structural nature of food inflation.
next mid-quarter policy
view is to be held on 16 December 2010. We are of the view that RBI may
for a rate hike in the December meet. However, RBI may decide to
monetary tightening in the third quarter of FY2011 based on the level
inflation in December 2010 and the subsequent impact of the earlier
rate hikes on
with 6 to 12
months time horizon can continue to invest in short-term funds because
situation is expected to remain
tight in the short term.
having a 12 months
to 18 months time horizon can invest in FMPs and long-term Gilt funds
as it is
a good time to lock-in yield at the current high levels.