The move to keep the operative policy rate unchanged was along expected lines. Though CPI (Consumer Price Index)-based inflation is very close to the 'glide path' of eight per cent and WPI (Wholesale Price Index)-based inflation is comfortable at 4.7 per cent, upside risks due to elevated core inflation and an uncertain monsoon have been factored in.
There is a distinct move to nudge banks to use the term repo facility and limit access to the overnight LAF (liquidity adjustment facility) window. The overall borrowing cap remains unchanged at one per cent of NDTL (net demand and term liabilities). Since term repo rates are higher, banks will see a slight increase in borrowing costs.
The five pillars outlined during the commencement of the governor's tenure have been followed seriously in the policy. For instance, guidelines permitting credit enhancement in corporate bonds are on the anvil, which will facilitate liquidity in corporate bonds, a major impediment. Measures to enable foreign investors to hedge currency and interest rate risks will augment FII (foreign institutional investor) flows. To encourage long-term capital flows, portfolio investors will be allowed to invest only in dated securities with residual maturity of at least a year, while investments in Treasury bills will be allowed to taper, subject to the cap for FII investments in government securities at $30 billion. Essentially, this is to replace shorter-term investments with longer-term ones, to encourage stable capital flows and limit volatility.
Also, there are measures aimed at micro, small and medium enterprises (MSMEs) and for consumers in general. The policy has urged banks to provide credit at easier terms to MSMEs and examine the possibility of allowing borrowers to pre-pay term loans without a penalty. However, the latter has implications on the asset liability profiles of banks and needs careful study. Yet another radical measure suggested is doing away with penal charges for not maintaining the minimum balance in savings bank and inoperative accounts. Distressed assets have been given been due attention, and this is a welcome sign. The policy projects real gross domestic product growth of five-six per cent. A notable exception is the absence of any estimate on credit and deposit targets for the year.
There is a distinct move to nudge banks to use the term repo facility and limit access to the overnight LAF (liquidity adjustment facility) window. The overall borrowing cap remains unchanged at one per cent of NDTL (net demand and term liabilities). Since term repo rates are higher, banks will see a slight increase in borrowing costs.
The five pillars outlined during the commencement of the governor's tenure have been followed seriously in the policy. For instance, guidelines permitting credit enhancement in corporate bonds are on the anvil, which will facilitate liquidity in corporate bonds, a major impediment. Measures to enable foreign investors to hedge currency and interest rate risks will augment FII (foreign institutional investor) flows. To encourage long-term capital flows, portfolio investors will be allowed to invest only in dated securities with residual maturity of at least a year, while investments in Treasury bills will be allowed to taper, subject to the cap for FII investments in government securities at $30 billion. Essentially, this is to replace shorter-term investments with longer-term ones, to encourage stable capital flows and limit volatility.
Also, there are measures aimed at micro, small and medium enterprises (MSMEs) and for consumers in general. The policy has urged banks to provide credit at easier terms to MSMEs and examine the possibility of allowing borrowers to pre-pay term loans without a penalty. However, the latter has implications on the asset liability profiles of banks and needs careful study. Yet another radical measure suggested is doing away with penal charges for not maintaining the minimum balance in savings bank and inoperative accounts. Distressed assets have been given been due attention, and this is a welcome sign. The policy projects real gross domestic product growth of five-six per cent. A notable exception is the absence of any estimate on credit and deposit targets for the year.
V R Iyer,
CMD, Bank of India
CMD, Bank of India