The mid-term review of the annual policy against the backdrop of a lot of intelligent speculations and surmises by analysts, financial journalists, bankers and market players in a way led to a lot of expectations this time. The policy announcement was coming at a time of rising inflationary trends, hardening of yield curve, below normal monsoon, excess liquidity and surging oil prices. In this background, I must say that governor has brilliantly calibrated a policy that is realistic and growth oriented.
The two paradigm shifts in the stance of monetary policy from the previous policies deserve special mention: the shift from 'adequate liquidity to meet credit/investment growth to 'appropriate liquidity' while placing an equal emphasis on price stability, and the shift from a 'soft and flexible interest rate' environment to pursue an interest rate environment that is conducive to macro economic and price stability.
This demonstrates that future decisions in this area would be made in a calibrated manner in respect of evolving circumstances to stabilise inflationary expectations as the governor indicated.
The increase in repo rate by 25 basis points is in keeping with market expectations and is not likely to result in hardening of interest rates, although it may raise expectations of depositors for higher interest rate.
The interest rate on NRE deposits is a welcome move, which will ensure continuous flow of these deposits for the banking system so that liquidity can be further eased to control adverse impact on interest rate hike.
At the same time allowing minimum tenor for all domestic deposits to seven days is likely to create a shift of deposits from low-cost deposits as this is likely to spur competition in retaining low-cost deposits and marginal increase in cost of deposits for bankers.
The policy continues the emphasis on priority sector lending and farm credit which will help banks to achieve increased targets as per the expectations of the government.
A number of initiatives are noteworthy such as removing restrictive practices under service area approach, except for government-sponsored programmes, increase in limits on advances under priority sector advances for dealers in agricultural machinery and distribution inputs, chancing advances to small and marginal farmers. For the first time, private banks are also covered under special agricultural credit plans.
Encouraging development of commodities and futures markets will gradually result in a better realisation of prices to farmers and maintaining price stability. Such a major change in agricultural scenario is a welcome initiative.
In a significant move, the RBI has increased risk weights from 50 per cent to 75 per cent in case of housing loans and from 100 per cent to 125 per cent in consumer credit, including personal loan and credit cards.
In the background of a huge increase in housing loan portfolio of banks and reported increase in number of frauds in this area, the concern of the regulators can be appreciated but the steps are little tough as it will affect the capital adequacy. Governor's statement to the electronic media that the RBI will examine the issues of excluding rural housing from revised risk weights is a welcome development.
Overall, the policy appears to be suited to existing and emerging economic scenario and, at the same time, addressing growth concerns.
