The RBI's stance on interest rates has taken a 270-degree turn with the current policy. The policies over the last two years have moved from a soft rate regime to a neutral stance and now to a regime with an upward bias. The repo rate, which has come to assume the role of a lead indicator for interest rates, has been hiked to give this signal.
Borrowing cost for corporates will go up and coupled with higher oil and commodity prices, the increase will put pressure on margins. The moot point is whether it was premature to hike interest rates when capital investments are just about showing a healthy spike.
Similarly housing loans and consumer credit will become expensive, as risk weightages for such loans for purposes of capital adequacy have been enhanced.
On credit delivery, RBI has suggested positive measures to ensure adequate credit flow to priority sector, especially agriculture and housing.
Continuing its welcome thrust on rural credit flow, the Central Bank has encouraged private sector banks to formulate agriculture credit plan for FY 2005-06 showing an annual growth rate of 20 - 25% Making available credit lines to NBFCs for funding of second-hand assets is a right step to ensure a better price discovery and creating a liquid market.
Relaxation of limits on forward contracts for foreign exchange transactions will facilitate flexibility and a view based risk management for corporates. All in all, a well managed tight rope walk balancing growth and price stability.
