BS JURY

MID-TERM REVIEW OF ANNUAL POLICY 2004-05

R Ravimohan,
Managing Director, Crisil

The policy is significant for the signals it gives about the future. It identifies inflation and fiscal discipline as potential difficulties, and accordingly braces the economic system.

Given their healthy deposit growth and their existing liquidity and the intense competition, banks are not likely to increase lending rates as yet.

In the medium term, banks would also feel the impact of lower lending margins as depositors will need higher interest to counter higher inflation.

Continuing pressure on the treasury portfolio will force banks to increase lending rates. Sponsors of investment should worry more about securing full funding for their capital projects and are well advised to make conservative estimates of interest rates.

Chris Low,
CEO, India Region Standard Chartered Bank

The RBI has sent a strong message in favour of price stability. While spurring growth is a key priority, inflation needs to be controlled at all costs.

This is a very positive pro-poor step. It needs to be recognised that oil is the wild card in the inflation control exercise. While oil prices and below normal monsoons have reduced the GDP growth forecast, the post-election slowdown in the US and a policy induced soft-landing in China will reduce the ongoing impact of commodities.

Oil prices will recede in line with this trend. That said, there is extreme uncertainty and monetary policy needs to respond to that on an ongoing basis. The proposed measures to enhance credit delivery to SSIs and agriculture sector are laudable.

 A M Naik,
Chairman & MD Larsen & Toubro

The RBI governor has reiterated his faith in monetary policy as an instrument to spur the economy by leaving the basic interest rate unchanged.

Simultaneously, he has adhered to the monetary policy objective of price stability through a 25 basis points increase in the repo rate. In line with expectations, the RBI has reduced the GDP forecast for 2004-05 from 7 per cent to 6.5 per cent.

On the other hand, it has raised the inflation forecast from 5 per cent to 6.5 per cent. By keeping interest rates unchanged, RBI has striven to ensure credit delivery to the private sector. It would not have any adverse impact on government finances.

Additionally, the discontinuation of the auctions of the 7 day and 14 day repo would encourage more bank funds towards industry.

Ashwin Dani,
Vice-chairman & MD Asian Paints

The mid-term review places concern on the effect of heightened inflationary pressures on economic growth.

This is reflected in the downward revision of GDP growth projection from 6.5-7.0 per cent to 6.0-6.5 per cent. The same concern has led to a repo rate hike by 25 basis points. This will mean an increase in borrowing costs for corporates, unless banks are willing to absorb the increase in rates.

Though the robust growth in non-food credit augurs well for the economy, the supply-shock driven inflationary pressures will impact growth prospects negatively.

The surge in oil prices will hit operating margins of the paints industry, though continued emphasis on housing credit as priority sector lending will boost the top lines.

R Jhunjhunwala,
Partner Rare Enterprises

The Governor deserves kudos for presenting a balanced monetary policy. While a temporary supply-constraint surge in energy and commodity prices ought not to lead to a tighter monetary response, the Governor has wisely chosen a calibrated response keeping in mind the quantum and persistence of the rise in energy and commodity prices.

Though this is not what the market wants, it might be what the economy needs. A 25 bps repo-rate hike is an appropriate signal to the financial markets, and may well prevent more future grief.

Availability and cost of risk capital is the paramount for our country to grow at 8 per cent on a sustainable basis. Flow of credit and exposure to capital markets is still strangulated.

Hemendra Kothari,
Chairman MSP Merrill Lynch Ltd

The mid-year review of the monetary and credit policy focuses on providing appropriate liquidity to maintain the growth momentum while moderating inflation expectations.

The broad focus remained on the signaling impact of the policy, and banking sector reforms as well as further easing of foreign exchange regulations. The bond as well as the equity markets have been pricing in a higher interest rate environment for the past few months.

The policy contained little surprises on the rates front and the RBI hiked the repo rate by 25 basis point to 4.75 per cent. The Bank Rate and CRR were unchanged. One positive to note here is the RBI's endorsement of strong growth despite the downward revision of GDP forecasts.

Sanjay Nayar,
CEO, India Citigroup

The RBI has attempted a balanced response to different variables facing the local economy viz, external risks, inflation and growth.

The 25 bps increase in repo rates, much lower than what the yield curve suggests, is an attempt to manage inflationary expectations especially given the strong retail credit growth, which could have further implications on demand side inflation.

The RBI's statement indicates that there could be further tightening of rates if global uncertainties persist or if fiscal policy responses to high crude prices are not adequate. The RBI continues to be flexible. For instance, the increase in NRE deposit rates is a change from its prior stance.

Keki Mistry,
Managing Director HDFC Ltd

The mid-term review distinctly sends out cautionary signals to banks regarding the rapid growth of their retail portfolios.

With about two-third of credit flow during the current financial year in retail, housing and other priority sector loans, the RBI has again emphasised on the need to ensure quality lending.

The temporary increase in the risk weights on housing and consumer loans should be viewed in the context of creating a level playing field between housing finance companies (HFCs) and banks as HFCs are required to maintain a minimum capital adequacy ratio of 12 per cent as against 9 per cent for banks.

The 25 bps increase in the repo rate is in line with expectations given the rise in inflation, the increase in overseas interest rates and the spike in bond prices.

A K Purwar,
Chairman State Bank of India

The governor has unveiled a growth-oriented policy, while finely balancing the concerns of inflation and growth in the economy. The thrust of the policy is clearly on risk management and preparing banks to manage in an increasingly uncertain environment.

Increase in risk weights for housing and consumer credit, as well as in-house assessment of existing risk management systems to comprehensively cover risk will help banks mitigate risk and migrate to Basel II norms.

Increase in the capital base for ARCs will bring in strong players and help expand the market for stressed assets. The Governor has struck a timely note of caution on oil prices and its impact on inflation and growth.

P S Shenoy,
Chairman & MD Bank of Baroda

The RBI has tried to strike a fine balance between economic growth and price stability. Without disturbing the momentum of growth, it has effected a symbolic increase of 25 basis points in the fixed repo rate (from 4.50 per cent to 4.75 per cent) to stabilise inflationary expectations.

However, it has left the Bank Rate unchanged at 6.0 per cent and this rules out the possibility of any sharp upward movement in the deposit or lending rates of banks. The RBI has realistically placed the real GDP growth projection for 2004-05 at 6.0 per cent to 6.5 per cent and headline inflation at 6.5 per cent.

The apex bank has correctly addressed the concern of reduced inflows by increasing the foreign currency non-repatriable deposit rates to 50 basis points over the Libor.