A pragmatic approach

MID-TERM REVIEW OF ANNUAL POLICY 2004-05/ GUEST WRITERS: VALLABH BHANSALI

Vallabh Bhansali

The credit policy has been very pragmatic in the context of the strenuous external environment.

It has realistically revised its forecasts for a year-end gross domestic product (GDP) growth down to 6-6.5 per cent and inflation up to 6.5 per cent owing to oil price pressures and a weak monsoon.

A 25 basis points hike in the repo rate, reflects more of a "readiness" to combat inflation rather than signalling any definitive reversal of the interest rate cycle.

While the focus remains on balanced growth, an uncertain external environment has led to the Reserve Bank of India's (RBI) preference towards inflation control in a calibrated manner.

Hence, it would be a pleasant surprise if the RBI is obviated from resorting to harsher measures in future. Further, it remains to be seen as to what extent RBI will succeed in using monetary policy to curtail a supply-side inflation.

To stem the slowdown in NRE deposits, as evident from the decline in the first quarter, the RBI has also nudged up these rates by 50 bps in line with the increase in US dollar interest rates.

Incremental non-food credit-deposit ratio of 96 per cent seen in this fiscal so far is very encouraging - signalling that bank funds are increasingly being utilised for more productive purposes.

However, noting the burgeoning consumer credit growth, it has increased their risk weightages - hence, banks will be forced to be a bit more circumspect on such loans.

The minimum maturity of commercial paper has been brought down from 15 to 7 days, which should help corporates manage their working capital more effectively amid volatile rates.

Banks also get an avenue for parking short-term funds in the absence of 7-day repos. Thus, short-term liquidity will be better utilised.

Interestingly, it has announced that the second draft of new ownership and governance norms for private banks will be released soon.

Hopefully, this will provide an impetus to foreign direct investment in private banks.