RBI slashes CRR by 0.5 percent

The Reserve Bank of India had decided to slash the Cash reserve ratio ( CRR ) by half a percent or 50 basis points thus bringing it down to 8.5%. The move is to release cash into the system and banks will find it easier to lend to borrowers.
Manic Monday saw the Sensex crashing to 5.78%, its third biggest fall this year. With global markets all trading in the red, it was an expected fall. The Dow Jones has now fallen below 10000 points, its first in more than four years. The European markets are also suffering and talks are on about a similar bailout package like the one in America which will help the major banks and financial corporations survive in these turbulent and uncertain times. The Nikkie, Hang Sheng as well as the other Asian markets also fell on Monday.
Meanwhile, the Reserve Bank of India, in probably the first of a lot of measures to be taken in order to bail out investors, slashed the cash reserve ratio by 0.5 percent. This is the first CRR cut by the RBI since June 2003. Though the move is expected to bring down the interest rates being offered by the banks, it may still be unlikely. For the moment the move is a good one as it will release almost 20,000 crores into the system. This amount may not be enough but as the Reserve bank has maintained that this is ad hoc, temporary measure and the reserve bank will watch and monitor as to what happens next. Though there will be liquidity but there is a fear in the market seeing the American and the global crisis and that is why the banks are not lending much. But the move is expected to bring down short term rates in the immediate future.
The Securities and exchange board of India also decided to do its bit by reducing the curbs on foreign investors over overseas derivates instruments(ODI’s) or the Participatory notes(P notes). The move was welcomed by foreign investors but may not translate into much due to the financial crisis else where in the world.
At a time when global crude oil prices are at a low at almost $90 per barrel, inflation should not rise. But the Reserve bank will have to be wary of the impact of the cut in the cash reserve ratio on the inflation numbers which were just below the twelve percent. Most of the banks in India though have welcomed the step taken by the reserve bank, but have said that it may not impact the interest rates but will definitely increase liquidity in the system thus making it easier for banks to lend. A lot will depend on the global financial crisis and the mood of the foreign investors. But as the finance minister has kept pointing out, the Indian market is safe and strong despite the global crisis. We can expect more such measures being taken by the Reserve bank in the coming months for the senses is trading at a two year low and the mood amongst the investors in the market is grim.

Budget 2008- What to expect?

The Annual Budget is just a month away. Whether it is the poorest of the poor or the richest Billionaires, all of them want a reduction in taxes. With this the last budget of the coalition government, will it be a dream one or will the FM play safe?

With just a month to go for the Annual Budget of 2008-09, it is time to speculate as to what changes can be expected in this edition of the Budget. The Indian economy has been sanguine with GDP growth of 9.25% in2006-07, inflation below the danger mark and sustainable interest rates. But what changes can be expected in this edition. Will there be any measures to counteract the effects of the recession of the US Economy? Will RBI step in to control the gargantuan influx of capital income into the economy. Well, the Finance Minister will have a lot of points to ponder on as he sets out to unleash his last budget of this term.

One thing that we cant ignore is that this will be the last budget of the current coalition Government. The United Progressive Alliance is due for its Lok Sabha elections in 2009 and with the dispute over the Nuclear Deal with the Left, the coalition has been on the Brink of Divorce. Thus, the Finance Minister might not give a budget that could stir up a political storm and bring the ruling government down. He would rather play safe. We can expect a popular budget with the aim of appeasing specifically targeted sections of the Voting Community. Thus vote bank politics could again play a vital role in this year’s Annual Budget.

P. Chidambaram had indicated that there could be a significant revamp in the taxation schemes. The Direct taxes could be reduced from the existing 33.6% inclusive of surcharge to about 25%-30%. Thus, the reduction in the Direct Taxes would come as a sigh of relief to the several individuals as well as corporates who are affected by the Direct Taxes. Reducing the tax rates could also provide an incentive to taxpayers to declare their entire income honestly so that the overall tax collections can be improved. Plus the Surcharge on tax which is paid by Individuals and association of people who have an annual income greater than Rs 10 lakh is expected to reduce. Currently, there is 10 per cent surcharge on personal and corporation income tax which may plummet in this budget. It could come down to as low as 5%. Partnership firms and domestic organisations, whose income is greater than Rs 1 cr will also benefit from this.

The recession of the US Economy has meant that the rupee has appreciated to a great deal. The exporters are feeling the brunt as their profit margins continue to go down. It is predicted that this trend is likely to continue. The RBI is expected to address this issue through its monetary policy and tax cuts in order to reduce the load on the exporters can also be expected. The fiscal deficit is expected to be scaled down to al little above 3% of its GDP. The FRBM Act that is the Fiscal Responsibility and Budget Management is proposed in this Budget. With respect to the fiscal deficits, the FM will also have to ensure that investments do not fall drastically.

It is a known fact that India has failed in having a World Class Infrastructure and has also not succeeded in providing adequate quality services in Education, Healthcare, Water Supply and Sanitation. The challenges of infrastructure will require large amounts of funds. It is believed that in this current eleventh five year plan from 2007 to 2012, we would need to invest almost US$500 billion to meet the infrastructure alone. This current budget could ease regulatory issues in order to facilitate building up of a World Class Infrastructure.

Lets just hope that Budget 2008 turns out to be the least taxing not just for the Finance Minister but also for the billion plus citizens of India.