RBI comes with new relaxations

The Reserve Bank of India was expected to be hawkish even as people hoped it would not burden them with one more interest rate hike. The Central Bank did relax a bit by not burdening borrowers with another increase too soon or any other indirect measure that would have hurt the individuals in search of a loan or companies seeking money to grow. But as usual it is in all preparedness to take whatever steps that situation would demand in future.

Governor Y V Reddy referred to the bank's relaxation of provisioning norms for home loans up to Rs 20 lakhs as "regulatory semi-forbearance". This temporary measure along with reduction in risk weight on loans against gold and silver ornaments up to Rs one lakh are the only concessions in an otherwise continuing tight money regime. "The medium term expectation for inflation is 4 to 4.5 per cent. To meet this target, RBI may have to resort to tighter monetary measures to manage the demand side if a measure taken to manage the supply side does not give the required effect," warns V P Shetty, CMD, IDBI.

From managing money supply through interest rate hike RBI has diverted some attention towards currency inflows. It has made it easier even for individuals, who for instance take educational loans to hedge their risk by permitting them to take current or capital account transaction up to $ 100,000 per financial year as against $50,000 limit at present.

Other measures in forex management include higher prepayment limit on external commercial borrowings (ECBs) up to $400 mn without prior RBI approval and enhancing the Indian companies limit for portfolio investment abroad in listed overseas companies to 35 per cent of their net worth. Mutual funs too can now invest upto $ 4 billion overseas. All these measures are intended to keep dollar inflows balanced with outflows to keep the rupee stable without RBI's direct intervention.

"These measures are in line with the liberalisation of outward investment policies and provide a level playing field to Indian firms relative to their foreign competitors. Additionally, the measures will help achieve a balance between capital inflows and outflows," said KV Kamath, MD and CEO of ICICI Bank in his press statement.

Increase in limit for investments abroad should induce high networth individuals abroad said Nipun Mehta, CEO Unitis Wealth Advisors. "The only potential investment avenue abroad was real estate and therefore the $50,000 limit was too small," Mehta said.

If the Union Budget put its thrust on inclusive growth, RBI has put its thrust on financial inclusion. It wants to build on the strength of domestic savings, which has financed 98 per cent of domestic investment.