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RBI rate cut + Fiscal stimulus package

December 8, 2008

Exclusive AnalysisRBI’s Weekend Package included Rate Cuts and Renewed Focus on FCCBs, Exporters and the SME Segment. In line with expectations, the RBI cut both the repo (liquidity injection) and reverse repo (liquidity absorption) rate to 6.5% and 5% respectively. While it may still take time for banks to cut rates meaningfully, what was encouraging was that the RBI has said that it –

will try to maintain a comfortable liquidity position, see that the weighted average overnight money market rate is maintained within the repo-reverse repo corridor.

FCCBs – Following last month’s measures, wherein the RBI permitted companies to buy back the FCCBs either with their FX resources/fresh ECBs, the RBI has now allowed companies to buy back FCCBs even out of rupee resources subject to certain conditions.

SME Segment – Refinance of Rs 70 bn: In addition to its earlier measure wherein the RBI allowed banks to avail liquidity support up to 1% of their NDTL to provide finance to micro and small enterprises, the RBI has now provided refinance of Rs70bn to the Small Industries Development Bank of India up to Mar 2010.

For Exporters – In addition to the earlier measure of extending the period for concessional credit from 6M to 9M, given the tightness in credit markets, the RBI has now decided to extend this facility to overdue bills up to 6M from the date of advance.

Fiscal Stimulus Package:
We call this a real intelligent move by the new Finance Minister Dr. Manmohan Singh. What the Government essentially did was offset the gains in Petrol, Diesel and Fertilizer subsidy bill towards this stimulus package thus maintaining the fiscal deficit at around 8.4% of GDP which will remain unchanged for FY09 as of now

The fiscal stimulus package includes, reduction in the central VAT rate by 4 percentage points (from 14% to 10%), and sops for the exports, textiles, housing, and infrastructure sectors. We expect the reduction in the VAT to be passed on to consumers and help in supporting consumer demand.

Key measures for exporters include – reduction in pre/post shipment export credit, additional allocation of Rs3.5bn for export-incentive schemes, Rs11bn for refund of terminal excise duty/CST; a back-up guarantee of Rs3.5bn to ECGC to enable it to provide guarantee for exports and service tax refunds, subject to conditions.

To facilitate financial closure for infrastructure projects under the PPP route, the government has permitted IIFCL to raise taxfree bonds to the tune of Rs100bn.

Overall this is very positive development, but unfortunately, downside risks still remain high and we view the markets with cautious optimism in the short term and maintain bearish outlook in the mid-long term.

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