New Year Bonanza from Govt and RBI

Fiscal Stimulus
Govt announced 2nd stimulus package today. The current measures together with earlier package constitute a
substantial counter-cyclical stimulus in the current year.
Some of the measures announced in 2nd fiscal stimulus include:
• External Commercial Borrowing (ECB)
– Ceilings on ECB borrowing removed under the approval route of RBI
– ECB can be used for the ‘development of integrated townships’
– NBFCs, dealing exclusively with infrastructure financing, would be allowed to access ECB.
• FII investment in Corporate bonds
– FII investment limit in rupee denominated corporate bonds in India would be increased from $ 6 bn to
$ 15 bn.
• Improvement in credit flow– An special purpose vehicle to provide liquidity (Rs.25,000 cr) support against investment grade paper
to Non Banking Finance Companies (NBFCs).
– PSU banks to provide a line of credit to NBFCs specifically for purchase of commercial vehicles.
– Credit targets of PSU banks are revised upward.
• Small and micro enterprise
– Increase the guarantee cover for micro-enterprises extended by Credit Guarantee Fund Trust to 85%
for credit facility upto Rs.5 lakh. This will benefit about 84% of total number of accounts.
• Borrowings– To meet expenditures, states will be allowed to raise in the current financial year additional market
borrowings of 0.5% of their GDP, amounting to about Rs 30,000 cr, for capital expenditures.
– India Infrastructure Finance Company (IIFCL) will be allowed to access in tranches an additional
Rs.30,000 cr by way of tax free bonds after utilization of Rs.10,000 cr. announced earlier for
refinancing bank lending to PPP infrastructure projects.
• Export Sector
– Duty drawback benefits on certain items including knitted fabrics, bicycles, agricultural hand tools
and specified categories of yarn are being enhanced.
– RBI to offer EXIM Bank a line of credit of Rs.5,000 cr and will provide pre-shipment and postshipment
credit, in rupees or dollars, to Indian exporters at competitive rates.
• Other measures
– As inflation is declining significantly, exemptions from CVD on TMT bars and structurals, and from
CVD and Special CVD on cement are being withdrawn. Full exemption from basic customs duty on
zinc and ferro alloys is also withdrawn.
– Accelerated depreciation of 50% will be provided for commercial vehicles to be purchased on or after
1.1.2009 upto 31.03.09.
• Recapitalization of banks
– The Plan for the next year will include proposals for recapitalization of the public sector banks. The
recapitalization is expected to be of the order of Rs.20000 crore over the next two years. This will
help to ensure that the banking system will not suffer from capital adequacy constraints in order to
provide credit growth needed to sustain the economic momentum in 2009-10


Monetary stimulus by RBI
Repo Rate
•Repo rate cut by 100 basis points from 6.5% to 5.5% with immediate effect.
Reverse Repo Rate
•Reverse repo rate cut by 100 basis points from 5.0% to 4.0% with immediate effect.
Cash Reserve Ratio
•Cash reserve ratio (CRR) of scheduled banks cut by 50bps from 5.5% to 5.0% from the fortnight
beginning January 17, 2009.

Bottomline:• Reduction of reverse repo to 4% will prompt banks to increase lending and not park money with RBI.
Also Repo rate cut is a clear signal to bring down lending rate. Both deposit and lending rates are
expected to come down.
• Three pronged action to unfreeze the credit market: 1) infuse liquidity Rs. 20,000 cr by CRR cut, 2) lower
cost of fund by slashing the policy rate, 3) increase credit target of PSU banks as well as recapitalization
of these banks.
• Funds to flow into infrastructure sector. The question here is how much money can be raised in current
global condition. Also whether developers will come up with bankable projects on which these funds can
be deployed.
• A positive for bond market. Increase in FII investment limit in corporate bonds will develop this market.
Rupee may be under pressure but positive long term impact.
• We expect monetary policy to do much of the heavy lifting in coming months as this was the last fiscal
stimulus announced by the Govt. Overall, very encouraging move. But, as Montek Singh Ahluwalia said
“Key is implementation of these projects”. Going by past records, our project implementation record
leaves a huge slip between cup and the lip.