Annual Credit Policy 2009- 10

Introduction Economic Parameters     GDP     Inflation     Fiscal Situation     Monetary and Credit Conditions     Liquidity Position     External Sector Monetary Measures and Regulatory Policies     Bank Rate     Cash Reserve ratio     Repo Rate/ Reverse Repo Rate     Financial Markets     Prudential Measures Market Reacts     Equity Market     Debt Market

Introduction

The Reserve Bank's annual credit policy for 2009-10 is significant as it comes amid fears of further deterioration in the global economy and its consequent impact on the country. The monetary policy stance of the Reserve Bank shifted from concerns related to inflation in the first half of 2008-09 to maintaining financial stability and arresting the moderation of growth in the second half. The broad-based industrial slowdown, dampened services sector growth, deceleration in private consumption and investment demand along with declining export demand are some of the major concerns the Indian economy is facing in the wake of the global recession at the present juncture. Reserve Bank of India (RBI) in its annual policy, gave highest priority to maintaining financial stability, growth of economy and maintaining orderly conditions in the financial markets. The RBI has cuts Repo and Reverse Repo by 25 bps each. Repo rate has been cut to 4.75% from the existing 5% and the reverse repo has been cut to 3.25% from the existing 3.5% while CRR has been left untouched at 5%. It is expected that an Interest rates cut will boost sagging economic growth and revive consumer demand. A decrease in interest rates means that those people who want to borrow money enjoy an interest rate cut. But this also means that those who are lending money, or buying securities such as bonds, have a decreased opportunity to make income from interest. Overall, the unifying effect of an interest rate cut is the psychological effect it has on investors and consumers; they see it as a benefit to personal and corporate borrowing, which in turn leads to greater profits and an expanding economy. Indian central bank revised the projection of overall real GDP growth for FY10 around at 6.0%. The RBI has raised the projection of money supply (M3) growth for 2010 to 17.0% from 19% earlier. The inflation target has been set at 4% by the end of March 2010, keeping in view the global trend in commodity prices and the domestic demand-supply balance.

Economic Parameters

GDP

The Central Statistical Organization (CSO)'s estimate of GDP growth is placed at 5.3% during the third quarter of 2008-09 as compared to 9% during the corresponding quarter of the previous year, reflecting deceleration in growth of all its constituent sectors. Consequently, the growth rate during the first three quarters (April-December) of 2008-09 slowed down significantly to 6.9% from 9% in the corresponding period of the previous year. The downside risks have since materialized and the GDP growth for 2008-09 is now projected to turn out to be in the range of 6.5 to 6.7%. CSO has placed the growth of real GDP originating in agriculture, industry and services at 0.6%, 3.5% and 9.7%, respectively, during April-December of 2008-09 as against 5.5%, 7.9% and 10.5% a year ago. During 2008-09, the area covered under sowing of various crops declined marginally during the kharif season on account of moderate shortfall in rainfall. On the other hand, the prospects for rabi production remain favorable with area sown under rabi crops being higher than a year ago. Total foodgrains production during 2008-09 was placed at 227.9 million tonnes (Second Advance Estimates) as compared with 230.8 million tonnes during 2007-08. The loss of growth momentum in the industrial sector was evident as the year-on-year expansion in the Index of Industrial Production was of 2.8% during 2008-09 (April-February) as against 8.8% in the corresponding period of the previous year. The manufacturing sector and the electricity sector registered growth of 2.8% and 2.4% as compared with 9.3% and 6.6%, respectively, during the above period. Machinery and equipment (other than transport equipment) exhibited double digit growth. In terms of use-based classification, capital goods production too registered double digit growth. After registering robust growth during the five year period 2003-08, the performance of the private non-financial corporate sector deteriorated in the first three quarters of 2008-09. Sales growth of companies decelerated sharply in Q3 of 2008-09. Profit margins were eroded by higher input costs, increased interest outgo, significant drop in non-sales income and losses on foreign currency related transactions.

However, in the context of the severity of the impact of the crisis on the real economy of countries around the world, the growth outcome (as compared to other countries) reflects the resilience of the Indian economy. Demand Components of GDP Private consumption and investment demand decelerated during Q3 of 2008-09. Government consumption demand, however, registered a sharp increase, reflecting the partial payout of the Sixth Pay Commission Award and other fiscal stimulus measures. As a result, the share of government consumption demand in GDP increased significantly. Deceleration in net exports growth in the successive quarters of 2008-09 had an adverse impact on the overall GDP growth. Impact The fiscal and monetary stimulus measures initiated during 2008-09 coupled with lower commodity prices could cushion the downturn in the growth momentum during 2009-10 by stabilizing domestic economic activity to some extent. While domestic financing conditions have improved, external financing conditions are expected to remain tight. Private investment demand is, therefore, expected to remain subdued. As a result, real GDP growth for 2009-10 is projected at around 6% in this year’s Annual Policy of 2009-10 by the RBI. Good news for the economy is that the India Meteorological Department (IMD) has said rainfall in the June-September 2009 monsoon season is expected to be 96% of the long-term average. The outlook is among the nation's most widely watched indicator as monsoon rains are a major influence on output of key crops, economic activity and also affects sentiment in the country's financial markets.

Inflation

Inflation conditions witnessed sharp volatility during the year as it firmed up considerably up to July 2008, but declined sharply thereafter. Inflation, based on the y-o-y changes in wholesale price index (WPI), increased sharply from 7.7% at end-March 2008 to an intra-year peak of 12.9% on August 2, 2008, reflecting the impact of some pass-through of higher international crude oil prices to domestic prices as well as continued increase in the prices of metals, chemicals, machinery and machinery tools, oilseeds/edible oils/oil cakes and raw cotton. Subsequently, WPI inflation declined sharply to 0.3% as on March 28, 2009, led by the reductions in the administered prices of petroleum products and electricity as well as decline in the prices of freely priced petroleum products, oilseeds/edible oils/oil cakes, raw cotton, cotton textiles and iron & steel. WPI inflation declined further to 0.18% as on April 4, 2009. Amongst major groups, primary articles inflation, y-o-y, increased from 9.7% at end-March 2008 to a peak of 12.7% on November 15, 2008. This mainly reflected increase in the prices of food articles as well as non-food articles. Primary articles inflation, however, eased substantially since January 2009 and reached 3.46% as on March 28, 2009 as prices declined in the case of food articles, especially vegetables and fruits and non-food articles like raw cotton, oilseeds and minerals. As international crude oil prices shot up during the first half of 2008-09, fuel group inflation, increased to an intra-year peak of 18% on August 2, 2008 from 6.8% at end-March 2008. Among the various freely priced petroleum products, prices declined by about 66% in case of aviation turbine fuel (beginning the first week of September 2008), about 55% in case of naphtha (beginning the first week of August 2008), about 53% in case of furnace oil (beginning mid-August 2008), about 41% in the case of light diesel oil (beginning the first week of December 2008) and about 32% in the case of bitumen (beginning mid-November 2008) as on March 28, 2009. Against this backdrop, the Government cut the price of petrol by Rs.5 per litre and diesel by Rs. 2 per litre effective December 6, 2008. As the international crude oil prices continued to remain around USD 40 per barrel the Government again cut the price of petrol by Rs. 5 per litre, diesel by Rs. 2 per litre and LPG for domestic use by Rs.25 per cylinder effective January 29, 2009. Consequently, the fuel group inflation turned negative (-6.11%) as on March 28, 2009. Manufactured products inflation, y-o-y, increased to a peak of 11.9% in mid-August 2008 from 7.3% at end-March 2008. This was mainly driven by sharp increase in prices of iron and steel, sugar, edible oils/ oil cakes, textiles, chemicals, and machinery and machine tools. Since September 2008, manufactured products inflation declined substantially and reached 1.42% as on March 28, 2009. Unlike the WPI based inflation, CPI based inflation in India, however, remained high. Consumer price inflation as reflected in various consumer price indices continued to remain high in the range of 9.6-10.8% during January/February 2009 as compared with 7.3-8.8% in June 2008 and 5.2-6.4% in February 2008.

Impact Sluggish real activities and rapid correction in commodity prices, in both international and domestic markets, have dampened inflationary pressures. In the coming weeks, we are likely to enter a phase of negative inflation. Apart from subdued demand and lower prices, a markedly favorable base effect may drive inflation further down y-o-y. With significant softening in inflation and rapid deceleration in economic activity, supporting growth will continue to be RBI’s primary concern.

Fiscal Situation

The finances of the Central Government in 2008-09 deviated significantly from the Budget Estimates (BE). Higher revenue expenditure together with lower revenue receipts led to a sharp increase in the revenue and fiscal deficits. Revenue deficit was 437 % of budget estimates for 2008-09 while Gross Fiscal deficit during the same period was 245% of the budget estimates. Revenue receipts of the central government amounted to 93.2% of the budget estimates of 2008-09 while Capital receipt was 229% of the budget estimates. Revenue expenditure and Capital expenditure increased by 22.1% and 5.1% respectively of the budget estimates. Budget for 2009-10 revised the estimates for 2008-09 revenue deficits to 4.4% and the fiscal deficit to 6.0% of GDP as against the budget estimates of 1.0 % and 2.5 % respectively. The Central Government announced three fiscal stimulus measures during December 2008-February 2009. The Government had also provided additional expenditure of Rs.1,48,093 crore (2.7% of GDP) through two supplementary demands for grants during October-December 2008. The total revenue loss due to tax reductions amounted to Rs.8, 700 crore (0.2 % of GDP) in 2008-09 and Rs.28, 100 crore (0.5 % of GDP) in 2009-10. Special bonds amounting to 1.8% of GDP were issued to oil marketing companies and fertiliser companies during 2008-09.

Monetary and Credit Condition

Monetary and credit aggregates have witnessed deceleration since their peak levels in October 2008. The Reserve Bank is committed to providing ample liquidity for all productive activities on a continuous basis. As the upside risks to inflation have declined, monetary policy has been responding to slackening economic growth in the context of significant global stress. While money supply evolved consistent with indicative projections, credit to private sector reflected the conditions evolving in the real sector of the economy. Growth in broad money (M3), year-on-year (y-o-y), was 18.4% at end-March, 2009 as compared with 21.2% a year ago, reflecting deceleration in the expansion of bank credit and capital inflows. Aggregate deposits of banks, y-o-y, was 18% at end-March 2009 as compared with 21.7% a year ago. Non-food credit growth (y-o-y) of SCBs to the commercial sector remained strong up to October 2008 on the backdrop of drying up of other sources of funds to industry but witnessed sustained deceleration thereafter. Non-food credit by SCBs was moderated to 17.5% y-o-y, at end-March 2009 as compared with 23.0% a year ago. The contractionary impact of decline in net foreign exchange assets on reserve money and domestic liquidity was offset by expansion through open market operations (OMOs), unwinding of MSS and other measures to augment rupee liquidity. Adjusted for the first round effect of the changes in CRR, reserve money growth (y-o-y) as on March 31, 2009, was lower at 19.0% as compared with 25.3% a year ago.

Liquidity Position

As the global liquidity crisis started to affect the domestic money and foreign exchange markets in the last quarter of 2008, the Reserve Bank ensured adequate provision of both domestic and foreign exchange liquidity to the market through banks, with the aim of restoring normal functioning of the market, and thereby facilitating adequate flow of credit to the productive sectors of the economy. The liquidity situation has improved significantly following the measures taken by the Reserve Bank. Since mid-September 2008, the Reserve Bank has cut the repo rate by 400 bps and the reverse repo rate by 250 bps. The CRR was also reduced by 400 bps. Due to consequences of the above liquidity of Rs.2,40,000 crore was injected in the economy. The statutory liquidity ratio (SLR) was reduced from 25 % of NDTL to 24%. The export credit refinance limit for commercial banks was enhanced to 50% from 15% of outstanding export credit which infused Rs.25,000 crore liquidity. A special 14-day term repo facility was instituted for commercial banks up to 1.5 % of NDTL. A special refinance facility was instituted for scheduled commercial banks (excluding RRBs) up to 1.0% of each bank’s NDTL as on October 24, 2008. The RBI announced OMO purchase of government securities of the order of Rs.80,000 crore in the first half of 2009-10, of which Rs.40,000 crore is envisaged for the first quarter of 2009-10. The Reserve Bank sold foreign exchange (US dollars) and made available a forex swap facility to banks. The interest rate ceilings on non-resident Indian (NRI) deposits were raised. The all-in-cost ceiling for the external commercial borrowings (ECBs) was raised. The all-in-cost ceiling for ECBs through the approval route has been dispensed with up to June 30, 2009.

Above actions of the Reserve Bank since mid-September 2008 have resulted in augmentation of  potential liquidity of over Rs.4,22,000 crore. However, despite comfortable liquidity in the system demand for bank credit is slackening.  Dampened demand has dented corporate margins while the uncertainty surrounding the crisis has affected business confidence.  The index of industrial production (IIP) has been nearly stagnant in the last five months (October 2008 to February 2009), of which two months registered negative growth. Exports have declined in absolute terms for five months in a row during October 2008-February 2009. Investment demand has also decelerated.  All these indicators suggest that growth will moderate more than what had been expected earlier. Despite the adverse impact as noted above, there are several comforting factors that have helped India weather the crisis.  First, the Indian financial markets, particularly banks, have continued to function normally.  Second, India’s comfortable foreign exchange reserves provide confidence in our ability to manage our balance of payments notwithstanding lower export demand and dampened capital flows.  Third, inflation as measured by the wholesale price index (WPI) has declined sharply. Consumer price inflation too has begun to moderate.  Fourth, because of mandated agricultural lending and social safety-net programmes, rural demand continues to be robust.

External Sector

India’s Balance of Payment   (USD billion) Item April-December   Aug-07 Sep-08 Exports 113.60 133.50 Imports 182.90 238.90 Trade Balance -69.30 -105.30 Invisibles, net 53.80 68.90 Current Account Balance -15.50 -36.50 Capital Account* 82.70 16.10 Change in Reserves# -67.20 20.40 * Including errors and omissions. # On a BoP basis (i.e., excluding valuation): (-) indicates increase; (+) indicates decrease.

India’s current account deficit (CAD) widened during 2008-09 (April-December) in comparison with the corresponding period of the previous year. As net capital inflows declined sharply, the overall balance of payments (BoP) position turned negative resulting in drawdown of reserves. As capital inflows during 2007-08 were far in excess of the normal absorptive capacity of the economy, there was substantial accretion to foreign exchange reserves by USD 110.5 billion. As capital inflows reduced sharply, the foreign exchange reserves declined by USD 53.7 billion from USD 309.7 billion at end-March 2008 to USD 256.0 billion by end-December 2008, including valuation losses. Excluding valuation effects, the decline was USD 20.4 billion during April-December 2008. India’s foreign exchange reserves were USD 252.0 billion as at end-March 2009 which increased to USD 253.0 billion by April 10, 2009.

Monetary Measures and Regulatory Policies

The central bank cut in both the short-term lending (repo) and the borrowing (reverse repo) rates by 25 bps to shore up faltering growth in the face of the global economic slowdown. The bank regulator decided to leave the cash reserve ratio (CRR) unchanged. With these cuts, the RBI has delivered 425 bps in cuts to the repo rate and 275 bps in cuts to the reverse repo rate since the rate-cutting cycle began.

Bank Rate

Bank rate is the rate of interest which a central bank charges on the short term loans and advances that it extends to commercial banks and other financial intermediaries. Any change in bank rate is a signal to the banks to revise deposit rates as well as prime lending rate. RBI has decided to maintain bank rate at its present level of 6%.

Cash Reserve Ratio (CRR)

Cash Reserve Ratio is a bank regulation that sets the minimum reserves each bank must hold to customer deposits in the form of cash reserves or by way of current account with the RBI, the objective of which is to ensure the safety and liquidity of the deposits with the banks. RBI has kept CRR unchanged at 5%.

Released on Rate cut Effective from CRR 2-Jan-09 50 BPS 17-Jan 5.00% 27-Jan-09 None - 5.00% 21-Apr-09 None - 5.00%

Repo Rate/ Reverse Repo Rate

Repo rate is the rate at which the RBI buys Government securities to infuse liquidity in the system. A reduction in the repo rate will help banks to get money at a cheaper rate. RBI has reduced the repo rate by 25 bps to 4.75% with immediate effect from April 21, 2009. In the last three months, the repo rate has been reduced from 5.50% to 4.75%.

Released on Rate cut Effective from Repo Rate 2-Jan-09 100 BPS Immediate 5.50% 4-Mar-09 50 BPS Immediate 5.00% 21-Apr-09 25 BPS Immediate 4.75%

Reverse repo rate is the return that banks earn on excess funds parked with the central bank against Government securities. RBI slashed reverse repo rate under LAF by 25 bps to 3.25% with immediate effect from April 21, 2009. The spread between Reverse repo and repo rate is on the 150 bps.

Released on Rate cut Effective from Reverse Repo Rate 2-Jan-09 100 BPS Immediate 4.00% 4-Mar-09 50 BPS Immediate 3.50% 21-Apr-09 25 BPS Immediate 3.25%

Impact The cut in rates essentially signaling to banks to lower their lending rates further. This will hopefully improve liquidity and spur demand. RBI added that most banks have reduced lending and deposit rates to some extent, but a few are yet to do so. This is a reiteration of the signal from RBI to banks and the credit market. The demand growth of home, auto and corporate loans are likely to become cheaper by this move.

Financial Markets

Keeping in view of the growing integration of the domestic financial markets with the international financial markets, RBI has taken several measures to improve the functions and efficiency of financial markets particularly the Money Market, the Government Securities Market and Foreign Exchange Market.

Money Market

It is proposed to extend the special refinance facility (which was introduced to provide funding to scheduled commercial banks (excluding regional rural banks) up to 1% of their net demand and time liabilities (NDTL) as on October 24, 2008 at the repo rate) up to March 31, 2010. It is proposed to extend the time for availability of the special term repo facility (a special 14-day term repo facility for banks through relaxation in the maintenance of SLR up to 1.5% of their NDTL, to enable them to meet the liquidity requirements of mutual funds, non-banking financial companies and housing finance companies) to banks up to March 31, 2010 and to conduct these 14-day term repo auctions on a weekly basis (auctions for the special 14-day term repo are conducted on a daily basis). It is proposed to review the ECR limit (the limit of the standing liquidity facility to banks in terms of export credit refinance (ECR) was raised from 15% of the eligible outstanding rupee export credit as on the preceding fortnight to 50% in November 2008) in March 2010. It is proposed to identify and address the macro-prudential concerns (liquidity stress recently faced by mutual funds, particularly the money market mutual funds) arising from the current framework in consultation with SEBI. The RBI-SEBI Standing Technical Committee has completed the preparatory work and an exchange traded Interest Rate Futures contract on the 10-year notional coupon bearing government bond is expected to be launched shortly.

Government Securities Market

Central Government Securities

Any new issuance of floating rate bonds (FRBs) would be in terms of the revised issuance structure. In consultation with market participants and the Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets, the structure of FRBs issued by the Government of India has been revised, which contemplates that: The auction will be conducted through the ‘price based’ process as against the ‘spread based’ process earlier; and The base yield for FRBs will be linked to the primary market cut-off yield of the 182-day TBs. The revised structure is expected to simplify the methodology for pricing of FRBs in the secondary market. The revised issuance structure for FRBs has been built into the negotiated dealing system (NDS) auction format being developed by the Clearing Corporation of India Limited (CCIL). The other recommendations of the Internal Working Group regarding Auction Process of Government of India Securities will be implemented after the amendments in the specific notification and in the scheme for non-competitive bidding facility by the Government of India. Withdrawal of the facility of bidding in physical form and submission of competitive bids only through the NDS; and Submission of a single consolidated bid on behalf of all its constituents by the bank/primary dealer (PD) in respect of non-competitive bids. The RBI has revised the existing limits for the Ways and Means Advances (WMA) for the financial year 2009-10 at Rs.20,000 crore for the first half and Rs.10,000 crore for the second half of 2009-10. The applicable interest rate will, continue to be linked to the repo rate. The RBI, however, retains the flexibility to revise the limits in consultation with the Government of India, taking into consideration the prevailing circumstances.

Debt Management for State Governments

The scheme for non-competitive bidding in SDLs will be operationalised during the current financial year in order to widen the investor base and enhance the liquidity for SDLs (State Development Loans). The State-wise limits of normal WMA for the year 2009-10 have been kept unchanged. The aggregate normal WMA limit for State Governments is placed at Rs 9,925 crore.

Development of Market Infrastructure

Separate Trading for Registered Interest and Principal of Securities (STRIPS) in Government securities will be launched during current financial year. The activity of stripping/reconstitution of securities would be carried out on the Public Debt Office (PDO)-NDS platform. It is proposed to issue revised guidelines on repo accounting, by end-June 2009 for implementation from April 1, 2010. A new settlement mechanism (Multi-modal Settlement) through commercial banks has been put in place to facilitate entities such as mutual funds (MFs), insurance companies, pension funds and co-operative banks which do not hold a current account with the Reserve Bank, to directly participate in the government securities market. The CCIL has operationalised a clearing and settlement arrangement for over-the-counter (OTC) rupee interest rate derivatives on a non-guaranteed basis. The trade reporting platform for OTC rupee interest rate derivatives is already functional.

Foreign Exchange Market

It is proposed to extend the relaxation in all-in-cost ceilings until December 31, 2009 considering the continuing tightness of credit spreads in the international markets. The proposals for buyback of FCCBs by Indian companies are being considered both under the approval and automatic routes. The entire procedure for buyback of FCCBs is required to be completed by December 31, 2009 and details of the buyback are also required to be reported to the Reserve Bank. It is proposed to increase the total amount of permissible buyback, out of internal accruals, from USD 50 million of the redemption value per company to USD 100 million, by linking the higher amount of buyback to larger discounts. It is proposed to enhance the cap of Rs.20 lakh to Rs.1 crore with immediate effect. As per the existing norms, Authorized Dealer Category–I and authorized banks are permitted to grant loans up to Rs.20 lakh against the security of funds held in NR(E)RA and FCNR(B) deposits. On the recommendation of the RBI-SEBI Standing Technical Committee, the position limits on the clients and trading members have been doubled from USD 5 million and USD 25 million respectively to USD 10 million and USD 50 million. However, the upper limits of 6% and 15% of the total open interest on the clients and trading members remain unchanged. The position limit for banks continues at 15% of total open interest or USD 100 million, whichever is higher.

Prudential Measures

Relaxations in the Branch Authorization Policy Proposal to allow scheduled commercial banks to set up offsite ATMs without prior approval subject to reporting. Proposal to constitute a Group to review the extant framework of branch authorization policy with a view to providing greater flexibility, enhanced penetration and competitive efficiency consistent with financial stability.  Presence of Foreign Banks in India  In view of the current global financial market turmoil with uncertainties surrounding the financial strength of banks around the world the RBI decided to continue with the current policy and procedures governing the presence of foreign banks in India. Mitigating Procyclicality: Use of Floating Provisions The G-20 Working Group on Enhancing Sound Regulation and Strengthening Transparency has recommended, as a part of measures to mitigate procyclicality that capital buffers above minimum requirements and loan loss provisions should be built up in good times in order to enhance the ability of the regulated financial institutions to withstand large shocks.  Credit Rating Agencies The Reserve Bank will liaise with SEBI on the issue of rating agencies’ adherence to Code of Conduct Fundamentals of the International Organization Securities Commission. Liquidity Risk Proposal to prepare a draft circular detailing the modalities for adopting the integrated liquidity risk management system as also the guidance note on ‘Liquidity Risk Management’ based on Basel Committee’s ‘Principles for Sound Liquidity Risk Management and Supervision’ brought out in September 2008 as well as other international best practices which would be placed on the Reserve Bank’s website by June 15, 2009. Financial Inclusion: Relaxing Eligibility Criteria for Banking Correspondents Proposal to constitute a Working Group to examine the experience to date of the business correspondent (BC) model and suggest measures, to enlarge the category of persons that can act as BCs, keeping in view  the regulatory and supervisory framework and consumer protection issues. Proposal to increase the maximum distance criterion for the operation of the BC for rural, semi-urban and urban areas from the existing 15 kms to 30 kms. Private Pool of Capital Proposal to issue a paper on prudential issues in banks’ floating and managing private pools of capital for eliciting public comments which will form the basis for finalizing regulatory guidelines by September 30, 2009. Stress Testing The Committee on financial sector assessment has recommended that there is a need for the banks themselves to carry out such periodic stress testing. It is proposed to upgrade the stress testing guidelines once the Basel Committee on banking supervision finalizes the paper based on comments received.  Securitization of Bank Loans Proposal to stipulate a minimum lock-in-period and minimum retention criteria for securitizing the loans originated and purchased by banks.

Market Reacts

Equity Market

Expectation: Indian banks have ample liquidity with them and have parked about Rs 1.5 lakh crore in government bonds over and above the regulatory requirement. In fact, banks are so flush with liquidity since the beginning of April 2009 that they have been parking a massive Rs 1.1 lakh crore with the RBI under the LAF window on an average on a daily basis. In light of this large liquidity overhang, RBI was likely to maintain status quo in respect of policy rates in the annual monetary policy, preferring to save the ammunition left with it for circumstances that are more demanding. However, the possibility of a 50bps cut in the Reverse Repo rate to further encourage banks to lend to the private sector was not rule out. Overall, it was expected that the RBI is to maintain an accommodative stance as the key priority for the economy is to maintain a downward trend in interest rates so that domestic demand starts reviving. However, the real challenge for the RBI is how to deal with the ever-enlarging fiscal deficit and getting long bond yields down. Reaction: Indian markets opened lower tracking weak Asian markets and uncertainty about interest rates ahead of a central bank policy review. Rate sensitive sectors like realty and banks were amongst the major losers in the opening session. Around 11 am (pre-announcement of credit policy) key benchmark indices Sensex and Nifty were under pressure by 1.38% and 1.12% respectively. BSE Midcap was down by 1.48% and BSE Smallcap was down by 1.48%. Among top sectoral losers were interest rate sensitives viz. BSE Bankex, Reality and Capital Goods lowered by 3.35%, 3.19% and 2.24% respectively. Around half hour post announcement of credit policy, key benchmark indices gained some grounds from the session low as investors showed some buying interest on the back of the Reserve Bank of India’s decision to cut repo and reverse repo rates by 25 bps. Sensex and Nifty were down 0.54% and 0.46% respectively. Broader market like BSE Midcap and BSE Smallcap too retrieved from lows to stand down by 0.95% and 0.82% respectively. Though interest rate sensitives were still among top losers, they also recovered from their lows. BSE Bankex, Reality and Capital Goods were lower by 2.08%, 1.78% and 1.77% respectively.

Equity Market Indices on April 21, 2009 Indices Closing Price Absolute Change % Change Sensex 10,898.11 -81.39 -0.74 Nifty 3,365.30 -11.80 -0.35 BSE Auto 3,364.41 -87.14 -2.52 BSE Bankex 5,316.70 -156.75 -2.86 BSE Capital goods 7,791.31 -190.93 -2.39 BSE Consumer Durables 1,846.25 -17.25 -0.93 BSE FMCG 2,104.30 32.47 1.57 BSE Healthcare 3,051.39 39.40 1.31 BSE IT 2,420.98 -39.46 -1.60 BSE Metal 6,836.88 -125.41 -1.80 BSE Oil & Gas 7,851.33 -23.24 -0.30 BSE Power 2,104.43 -15.77 -0.74 BSE Realty 2,249.31 49.96 2.27

However, the announcement of credit policy by RBI was a non-event for the markets as, at the end, markets landed in negative precinct after a volatile session. Sensex closed at 10,898.11, down 81.39 points or 0.74%. The index touched a high of 11,068.82 and low of 10,764.08 during today’s trade. Nifty ended at 3,365.30, down 11.80 points or 0.35%. The index touched a high of 3,414.70 and low of 3,309.35 during today’s trade. The market breadth indicating the overall health of the market remained weak as 1,288 stocks closed in red while 1,226 stocks closed in green and 83 stocks remained unchanged on BSE. Looking at broader market, BSE Mid Caps closed with losses of 5.77% at 3523.14 while Small Caps closed with gains 16.83 points at 4,027.98. BSE Bankex dropped by 2.86% or 156.75 points at 5,316.70 despite RBI’s rate cut as it is expected that the reduction would not translate into significantly higher credit growth. Scrips that lost were ICICI Bank (-6.51%), Bank of India (-5.59%), Punjab National Bank (-4.19%), Bank of Baroda (-4.06%) and Kotak Bank (-3.31%). BSE Realty index advanced by 2.27% or 49.96 points to close at 2,249.31 on expectations that lower rates will spur housing demand. Main gainers were Anat Raj (9.97%), Orbit Co (8.47%), Indiabull Real (5.44%), Housing Dev (5.17%) and DLF Ltd (2.84%). BSE Auto index lost 2.52% or 87.14 points to close at 3,364.41 on profit booking after a recent sharp rally in past trading session. Losers were Maruti Suzuki (-5.38%), Tata Motors (-5.18%), Amtek Auto (-2.57%), M&M Ltd (-2.45%) and Hero Honda Motors (-2.11%). BSE Capital Goods index also ended lower by 2.39% or 190.93 points at 7,791.31. Punj Lloyd (-8.62%), Siemens Ltd (-4.65%), Crompton Greaves (-4.35%), Kalpat Power T (-3.61%) and L&T Ltd (-3.41%) ended in negative territory.

Debt Market

Government bond yields slipped to fresh 1-½ month lows in today’s early trade, taking cues from lower US treasury yields and supported by easy cash in the banking system. Around 9.50 am, the yield on the 10-year benchmark bond (6.05% GS 2019) was at 6.32%, below Monday's close of 6.39%. Yield on the 6.05% note due 2019 was at 6.26% just before the announcement of the policy and slipped to as low as 6.19% after RBI reduced both signaling interest rates for a third time this year. During, mid afternoon, the bond rally picked up further steam with the yield, on the benchmark 10-year bond rallying to a one and a half month high, of 6.16%. At the end, the yield on the 10 year benchmark bond ended at 6.29%. Analyst said surplus cash in the banking system was adding to the good mood in the bond market rally.