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ALTHOUGH in its recent policy meeting, the Reserve Bank of India ( RBI) kept its key policy rates unchanged, namely the cash reserve ratio ( CRR), the repo rate and the reverse repo rate; it has indicated a tighter monetary stance going forward. The central bank has not only raised the portion of deposits that banks are required to keep in government securities i. e. the statutory liquidity ratio ( SLR) by 100 basis points to 25 per cent, it has also increased the overall provisioning for banks to 70 per cent and the provisioning requirement for advances to the commercial real estate sector from the present level of 0.40 per cent to one per cent, which means that now the banks would have to set aside Rs 1000 for every one lakh lent compared to Rs 400 earlier. According to Vikram Kotak, chief investment officer of Birla Sun Life Insurance, the RBI has focused on controlling asset prices and inflation by using alternative measures instead of hiking interest rates since any rate hike at this juncture would snap the very recovery process. Although the increase in SLR also is not likely to have much impact on the liquidity position of banks or credit to the private sector, the provisioning is expected to be 20 to 25 per cent of the sector’s expected profits for 2009- 10 and 2010- 11, as per a CRISIL report. Having said that, with comfortable liquidity in the system and with credit growth picking up, eventually the fundamentals will take banking stocks to higher levels, says Vaibhav Agrawal, VP Research Banking at Angel Broking.

These moves have sent out mixed signals for your various investments — be it bonds, fixed deposits or stocks as the RBI’s concern is inflation and liquidity management, which could lead to rate hikes sooner or later. In fact Abeek Barua, chief economist at HDFC bank predicts a hike in the policy rates by 25 bps in the January, 2010 credit policy meet. However, he does not see any significant impact of the policy on credit markets and sees stable deposit and lending rates. One could see a rise in bond yields, which could depress the market value of bonds, thus impacting the return from long term bond funds. It would be wiser to stay invested in the shorter end of the yield curve as of now i. e. debt funds with shorter duration, says Vikas Agnihotri, CEO, Religare Macquarie Wealth Management.

In fact, various stocks within the banking and real estate space have not reacted well to the credit policy decisions. While the Sensex was down 1.6 per cent, the realty index lost over seven per cent after the policy announcement.

The increase in provisioning for real estate loans is likely to increase the cost of funds by 50- 60 bps going forward but who will bear this cost has yet to be seen. In the near term i. e.

the next six months, developers have indicated that their incremental borrowing cost may not go up since most of them have taken long term loans, thereby locking in rates, says Param Desai, Real Estate Analyst at Angel Broking.

Banks are only likely to pass on the hike if the loan is seen as sub standard.

Also, most real estate companies have bettered their debt to equity ratios after raising funds through QIP’s, with the average ratio in the region of 0.4- 0.5, says Desai, which puts them in a more comfortable position as of now.

Most analysts are of the opinion that the policy decisions have been taken to caution banks from lending more prudently and the market was anyway waiting for a correction. If we take a look at the period of Jan 04- Dec’ 07, when RBI hiked CRR by 300 bps and Repo Rate by 175 bps, equity markets ( Sensex) rose by 3.5 times, demonstrating that monetary tightening does not always have negative impacts on the equity markets, says Kotak.

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