The overall stance of the policy is to provide appropriate liquidity to meet credit growth and support investment and export demand in the economy while placing equal emphasis on price stability, considering the current Indian and global economic condition. It is a very 'stick-to-the-basics' policy. Volatile and increasing oil prices in international markets will continue to exert upward pressure on headline inflation. The impact of increased prices has not yet been absorbed. The policy has acknowledged this aspect, and this could singularly affect the GDP growth story.
With the deficient rainfall, rising import prices [primarily due to oil], we should not expect an unduly high GDP growth.
The overall GDP growth for the year 2004-05 in the range of 6.0 to 6.5 per cent would be reasonable, assuming that the combined downside risks of high and uncertain oil prices, and sudden changes in international liquidity environment remain manageable. Even with this rate of growth, India would be among the faster growing economies.
The need for inflation targeting is evident and all that is being done to sop of liquidity in the market is great. Expectedly, the repo rate has been increased by 25 bps and other liquidity control measures have been announced. Inevitably, this will result in further upward push to interest rates.
In such times, when industry has come out of their complacency and the credit off-take has seen good growth, care and discretion must be exercised that this trend is not impeded.
The policy did not shed any light on the much-debated issue of guideline on ownership and governance. Many foreign and private banks, which are eagerly awaiting these prior to planning their next moves for India, will have to wait some more.
The policy tries to justify classification of securities held for SLR purposes as HTM and not subjecting it to MTM variations. This is not in-sync with RBI's overall move towards international best practices.
Clearly banks must recognize and appreciate the dynamics of interest rate cycles and this as been adequately brought out by the policy.
Whereas the impetus provided to delivering credit to the agricultural sector is laudable, similar stringent mechanism to trap cash flows and other structural steps to collect interest and loans repayments need to be actively implemented. Often banks are shy of lending to farmers because of their inability to establish an efficient mechanism to collect loans.
Currently the boom in housing loan has not adequately perpetrated to interior India - especially mid-sized towns. Enhancement of ceiling of banks' direct finance for housing to Rs 15 lakh is a right step. However, increasing the risk assigned to such loans may partially offset this drive.
The increased consumerism has not been experienced by rural India, as by urban India.
This increased risk weighs on personal loans, and credit cards will not encourage the banks to explore such rural markets.
