— PHOTO: VIVEK BENDRE

BALANCING ACT: Dr. Y. V. Reddy, Governor, Reserve Bank of India, announcing the third quarter review of monetary policy for 2006-07 in Mumbai on Wednesday.

MUMBAI: The Reserve Bank of India on Wednesday signalled its determination to rein in spiraling prices by making short-term lending to banks by the apex bank dearer by 25 basis points. It also imposed a lower ceiling on interest rate payable on non-resident deposits and restricted the loans against such deposits to Rs. 20 lakhs, in an effort to prevent circulation of funds for speculative purposes.

Taking note of the fact that inflation had exceeded the target of 5-5.5 per cent that it had set itself as a result of a variety of factors, both domestic and international, the RBI tightened provisioning for bank exposures to the capital market and real estate (as distinct from lending for individual housing) in a bid to curtail demand.

The RBI Governor, Y. V. Reddy, in his customary media conference on the occasion of the third quarter review of the annual monetary policy statement, said tightening of the monetary policy to reduce inflation would not hamper the high levels of economic growth (8.5 to 9 per cent) achieved this year, and on the contrary would help maintain the growth in the face of demand pressures and rising prices of commodities - both agricultural and industrial.

Even while keeping the bank rate, the reverse repo rate (the rate at which banks park their short-term funds with the RBI), the CRR and the SLR unchanged, the RBI Governor made it clear that the bank would be prepared to wield any instrument at its command in pursuit of its goal of ensuring growth with stability. It would also act "swiftly" as warranted by circumstances, he said.

The RBI raised the short-term rate by increasing the Repo rate (the rate at which the central bank lends short-term funds to banks) by 25 basis points to 7.50 per cent from 7.25 per cent with immediate effect. In the current financial year, the RBI earlier raised the Repo rate by 25 basis points on October 31.

"The central bank is trying to make funds costlier for the system to moderate the demand,'' Dr. Reddy said while announcing the third quarter review of its Annual Policy 2006-07 here.

The apex bank also increased the provisioning requirement to two per cent from one per cent for the banks' exposures in the standard assets in the real estate sector, outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans, excluding residential housing loans.

"The continued high credit growth in the real estate sector, outstanding credit card receivables, loans and advances qualifying as capital market exposure and personal loans is a matter of concern,'' it stated.

The provisional requirement in respect of residential housing loans will remain unchanged at 0.4 per cent to loans upto Rs. 20 lakh and at one per cent for loans in excess of Rs. 20 lakh.

It has also been decided to increase the provisioning requirement for banks' exposure in the standard assets category to the non-deposit taking systemically important non-banking financial companies (NBFCs) to two per cent from the existing level of 0.4 per cent and to increase the risk weight for banks' exposure to such NBFCs to 125 per cent from the existing level of 100 per cent.

However, provisioning requirements and risk weights for banks' exposure to asset finance companies will remain unchanged.

Similarly, the provisioning requirements in regard to agricultural loans, loans to Small and Medium Enterprises (SMEs) and loans to industry in general remain unchanged.

According to the RBI, a sizable increase in Non-Resident (External) Rupee Account [NR(E)RA] and Foreign Currency Non-Resident (Banks) [FCNR(B)] deposits has been observed in 2006-07 so far.

At the same time, there are reports of large growth in advances being granted against such deposits.

Now the RBI has reduced the interest rate ceiling on NRE deposits from 100 basis points to 50 basis points above LIBOR/SWAP rates for U.S. dollar of corresponding maturity and Interest rate ceiling on FCNR (B) deposits reduced from LIBOR/SWAP rates to 25 basis points below LIBOR/SWAP rates for respective currency and maturities.

Further, banks are restrained from granting fresh loans, in excess of Rs. 20 lakh, against NRE and FCNR (B) deposits, either to depositors or to third parties and being advised "not to undertake artificial slicing of the loan amount to circumvent the ceiling.''

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