Ambit Corporate Finance The Reserve Bank of India's (RBI) annual policy for 2005-06 has been announced at an opportune time after the Indian economy posted an overall commendable performance in 2004-05 and the focus at present is on rising commodity prices, volatility in capital flows and rise in interest rates worldwide.
Although the economic signals and corporate data have been conflicting, the policy confirms the strong buoyancy of the Indian economy and with adequate checks and balances it augurs for continued resilience of the Indian economy in 2005-06.
The policy has left most aspects of the current monetary policy untouched except for the rise in reverse repo rate by 25 basis points which is seen as a measure to check the potential spiraling of inflation on account of passing on the rise in oil prices and the possible effect in case of a less favourable monsoon in the coming months.
The policy has announced many measures that address the structural aspects of the financial services sector and the economy. Specific measures such as providing greater flexibility in money market operations and allowing for consolidation of the securities market are welcome.
With a healthy foreign exchange reserve position and a measure which signifies greater confidence in corporate India, leveraged overseas acquisitions can now be accomplished without prior regulatory approvals.
The RBI has also indicated the need for calibrated consolidation and restructuring across the financial services sector, including NBFCs, public and private banks, RRBs and UCBs.
While this measure will ensure an efficient banking system and larger access to banking products and services, the RBI will do well with an approach that is well thought and which is possible of being implemented and result in least impact to the business and banking sector.
Further, while the cloud over the securitization process has been settled, the RBI needs to provide a robust framework for handling stressed assets and ensuring transparency and accountability by banks in such transactions.
The Credit policy has clearly highlighted the need for constant change and up-gradation of the regulatory mechanism and technology infrastructure in order to ensure a conducive financial services sector which plays a critical role in the economy.
While the quarterly review of the policy is a welcome move, one hopes that the RBI does not experience the market pressures and expectations that are typical of listed corporate entities.
