RBI credit policy opens dollar tap for India Inc

The Reserve Bank of India, in its annual review of the credit policy announced on Tuesday, has opened the door fairly wide for India Inc to foray abroad.

Indian companies can now invest 300 per cent of their net worth in foreign joint ventures and wholly owned subsidiaries, up from 200 per cent; they can put 35 per cent of their net worth into portfolio investment in overseas listed companies, up from 25 per cent; and they can prepay $400 million of external commercial borrowings (ECBs) under the automatic route, up from $300 million.

Besides, Indian producers can hedge against volatility in the prices of aluminum, copper, lead, nickel and zinc on international commodity exchanges and airlines can hedge against jet fuel price changes.

This apart, the RBI has also enhanced the ceiling on aggregate overseas investment by mutual funds to $4 billion from $3 billion.

Projecting a gross domestic product (GDP) growth rate of 8.5 per cent with inflation at 5 per cent in 2007-08, the RBI kept the repo and reverse repo rates unchanged and maintained the cash reserve ratio at 6.5 per cent. The RBI is estimating inflation to moderate to a more tolerable 4-4.5 per cent in the medium term.

The central bank, outlining its monetary stance for the year ahead, said its policy would reinforce the emphasis on price stability while ensuring an interest rate environment that supported export and investment demand. Its focus would be on credit quality alongside greater credit penetration and financial inclusion. The RBI also said it would respond swiftly to the evolving global and domestic situations impinging on inflation expectations and the growth momentum.

The central bank is targeting money supply growth at 17-17.5 per cent over the year, up from the 15 per cent in 2006-07 and has also budgeted for higher non–food credit growth at 24-25 per cent against the target of 20 per cent in 2006-07.

The RBI has also proposed to set up a working group to go into issues relating to interest rate derivatives and to suggest measures to facilitates the development of an interest rate futures market. Another group will be formed on currency futures to study the international experience and suggest a suitable framework for the market.