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RBI Hikes Lending Rates

Highlights of RBI Quarterly Review of the monetary policy and views of the leading fixed income fund managers

To combat inflation RBI today revised the Repo rate along with CRR to 9%, GDP growth rate to 8% and taming inflation to 7% , where as bank and reverse rates has been left unchanged.

- Repo rate increased by 50 basis points to 9% from immediate effect and CRR hiked by 25 basis points to 9% (with effect from August 30, 2008)
- Bank rate and reverse rates unchanged at 6%
- It aims to bring the current level of inflation close to 7% by March 2009. Inflation target is to bring it down to tolerable level of below 5% as soon as possible and around 3% for the medium term.
- GDP growth production has been revised from 8.0-8.5% to 8% also recognizing the concern around the slowdown in industrial activity and some service sectors.
- Expects supply improvement to help tame food inflation in the near term, given positive rainfall trends within the country and supply expansion globally
- Banks have been asked to focus on their credit quality so as to moderate the current increase in credit growth and ensure healthy balance sheet.

Fund Views:
Mr. Nandkumar R. Surti, JP Morgan Asset Management India
"In our opinion, increasing the repo rates and CRR is due to a single-minded focus of controlling the inflation and managing inflationary expectations. We expect the RBI to continue be very vigilant on inflation and take various policy measures to keep the inflation under check and manage inflationary expectations"

He further added that, it is pre-emptive steps to control the demand pressure which might aggravate the in coming months due to fiscal stimulus in the of the 6th pay commission. Explaining his view on the government stand of quality check on the credit he said, "The RBI has asked to focus on the credit policy in a preemptive step to avoid a credit crisis like what we have witnessed globally"

Mr. Santosh Kamath, CIO - Fixed Income, Franklin Templeton Investments
"The monetary policy was along the expected lines, except that the quantum of rate hikes took the markets by surprise". Reiterating the general view of experts they maintained, latest monetary measures and policy review clearly reflect the increasing emphasis on reining inflationary pressures and credit growth to the targeted levels.

On Franklin Templeton Investments strategy he said, "We will continue to maintain lower portfolio durations to minimize the impact of rate increases and also look to take advantage of any sweet spots across the yield curve. A clear focus on minimizing credit risk would be important in the current macro scenario." For investors he suggested that, the focus should be on FMPs and short term accrual products.

Mr. Navneet Munot, Executive Director, Morgan Stanley

"We expect more upward revisions over the next few months." Further adding, he said "There are visible signs of moderation in economic growth and some softening in global commodity prices; however, price stability seems to the main priority for the central bank at the moment. Trends in monsoon and sowing pattern so far has not been very encouraging and there is possibility of spike in prices of some of the food items. The global situation remains fluid and RBI should continue to tread a cautious path."

On the RBI's hike in CRR and increase in Repo rate he maintained, "RBI will continue to use all tools at its disposal (CRR, MSS and open market operations) to ensure that systemic liquidity (LAF balances) remains in deficit mode and overnight rates hover around the repo rate. RBI acknowledges that excess money creation and higher credit growth are keeping the buoyancy in aggregate demand and fuelling inflation. RBI is determined to bring down money supply growth to 17% and bank credit growth rate to 20% and it will not hesitate to take further actions in order to achieve these targets."

He advised cautious approach to the investors towards duration and credit risk while adding that there will be a bearish view on bond market. He also said, "We expect liquidity conditions to tighten significantly and macro economic environment to deteriorate."