First quarterly review on July 26

ANNUAL POLICY 2005-06/ THE ROAD AHEAD

Following in the footsteps of central banks in many developed markets, the Reserve Bank of India (RBI) proposes to undertake quarterly reviews of the monetary policy. The first quarter review will be undertaken on July 26, and could contain changes and measures as warranted.

The RBI governor, Y V Reddy said quarterly reviews are being undertaken as part of global best practices.

"If required we are prepared to undertake these quarterly review meetings once a month, but for now we will go with a quarterly system as we move towards global best practices," said Reddy.

The US Fed undertakes a monthly review of monetary measures. The RBI governor said that it will start with quarterly reviews to be undertaken in the months of July and January, in addition to the two credit policies in April and October.

India has witnessed volatility in inflation rates during 2004-05. It has also seen some hardening in interest rates.

The RBI governor pointed to the need to ensure stability in the market, contain and manage inflation. The idea is to maintain smoothness in the system, which the central bank hopes to achieve by absorbing all shocks, said Reddy.

Unlike in the past, things are now more in a fluid stage as it is not just domestic factors that affect the Indian financial markets, but also global factors.

With greater integration of Indian market with global markets "" in terms of oil shocks, interest rate movements and currency imbalance "" these aspects could call for change in RBI measures.

Hence the RBI has decided to adopt a proactive approach and communicate its stance on monetary issues with quarterly reviews of its policies.

The governor expressed confidence that India was not as vulnerable to global risks as other emerging markets since it was not as integrated into the global market.

Nandkumar Surti, head-fixed income, JM Financial Mutual, told Crisil MarketWire that the quarterly review is a good development. The reverse repo rate hike of 25 basis points has surprised the market. But it is a proactive measure.

The (rise in) global crude oil prices are still a concern. With the quarterly review, the policy will be moving either ways.

With inflation between 5.00-5.50%, it is good for the market. I think the yield on 10-year benchmark (7.38%, 2015) will stabilise at 7.25%.

The proposals of short selling in gilts, gilt settlement on T+1 basis, and screen-based trading are long-term measures, which are definitely good steps for the market.

Nilesh Shah, chief investment officer, Prudential ICICI Mutual Fund, believes the biggest positive of the annual policy statement is that RBI will now have four quarterly reviews.

This way, RBI will be able to communicate with the market. I think the market today reacted in panic as it was not expecting a reverse repo rate hike. I see the yield on 10-year benchmark bonds stabilising in the range of 7-7.25%.