Views on Credit Policy - Mr. Aneesh Srivastava, CIO - IDBI Federal Life Insurance Co. Ltd.

Credit polity announced by RBI is on expected lines. Inflation in August '10 has remained at elevated levels of 8.62% which is marginally higher than 8.51% in August '10. Rate hike is also preemptive because any quantitative easing in developed world would lead to rise in commodity prices and hence would put pressure on domestic inflation. Rate hike is also appropriate from the perspective that real interest rates in economy are still negative with repo at 6% (now increased to 6.25%) and inflation at 8.62%. If inflation shows downward trend and comes down to 5.5% by the year end, which is the expectation of RBI, real interest rates would turn positive.

Announcement of reduction in Loan to Value ratio from 95% to 80%, Increase in risk weights for loan of more than Rs.75 lakhs from 100% to 125% would only have psychological impact on real estate sectors as most of the loans are within revised limits. However, increase in provisioning requirement for Teaser Rates from 0.5% to 2% for banks would have impact on banks which have offered such loans.

Rising rate would put further pressure on IIP growth which has slowed down to 5.6%.

Since policy was on expected lines, we expect 10 year bond yields to trade between 8% to 8.25% range in near term.

Source : Equity Bulls

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