RBI’s stimulus package is here

RBI’s stimulus package is here

While the recent inflation numbers have not particularly been a cause of worry for the RBI, a moderation in the real GDP growth, slowdown in industrial and infrastructural activity, muted prospects of growth in service sectors (hospitality, tourism, IT services, financial services) and absolute decline in exports for the first time in seven years seem to have necessitated a stimulus.

The RBI’s recently released data indicate that the demand for bank credit has slackened in November 2008 (from 25% YoY growth during the period April to September) despite comfortable liquidity. Higher input costs and dampened demand have also dented corporate profitability while the uncertainty surrounding the crisis has affected business confidence.

The following are some of the key highlights of the package

• The central bank has once again tweaked its oft-used tools of monetary policy to offer additional liquidity to the banking system. It has reduced the repo rate (rate at which it lends to banks) by 1% from 7.5% to 6.5% and the reverse repo rate (rate at which banks lend to RBI) by 1% from 6.0% to 5.0%, effective December 8, 2008.
  
  

• To enhance credit delivery to the labour- intensive micro and small enterprises (MSE) sector, the RBI will provide refinance facility to the tune of Rs 70 bn to the Small Industries Development Bank of India (SIDBI) that is the prime financer to such enterprises.
  
  

• To bring some relief to the real estate and housing finance sector, the RBI has allowed loans granted by banks to housing finance companies (HFCs) for lending towards houses costing less than Rs 2 m to be classified under priority sector lending. However, the eligibility under this measure will be restricted to 5% of the individual bank’s total advances. This dispensation will apply to loans granted by banks to HFCs up to March 2010. A refinance facility of Rs 40 bn is also being worked upon for the National Housing Bank (NHB) to lend directly to HFCs. Further to prevent banks from accumulating large real estate - linked NPAs, the RBI has extended an ‘exceptional/ concessional treatment’ to loans disbursed to the sector that are currently delinquent but can be restructured by June 2009.
  
  

• Proposals have also been put forward for easing credit to exporters and allowing repayment of foreign debt by Indian corporates.

While the package essentially caters to the sectors that are currently under stress, the central bank is hopeful that it will extend some respite to the others that have the potential to shoulder the revival of the economy during the slowdown.