BS JURY

ANNUAL POLICY 2005-06

R N Bhardwaj
Chairman
LIC

The general tenor of the Reserve Bank of India's (RBI) annual policy statement is to keep the interest rates benign and hence there should be a stability in prices.

The increase in reverse repo rate by 25 bps will of course have an impact on interest rates in the short term. The interest rate may go up by 15 to 20 basis points but there is no change in the cash reserve ratio and the repo rate has been kept unchanged.

The interest rate will increase if there is inflationary pressure due to crude oil prices. Government borrowing may have some impact on the liquidity. We think generally the monetary policy is neutral so far as the interest rates are concerned and it may not have much impact on the LIC.

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Keki Mistry
Managing Director
HDFC

Globally, interest rates are moving up and the Indian financial market is no longer insulated from global events.

The Reserve Bank of India (RBI) has successfully addressed the conflicting imperatives of reining in inflation and managing interest rates in a manner that fosters the growth momentum, at the same time signaling an upward bias in the interest rate environment.

There is surplus liquidity in the system , but that will soon evaporate given the government's huge borrowing programme and the rapid credit pick-up.

On the inflation front, the steep rise in oil prices has not yet been factored in domestic oil prices and the bond market is already showing signs of nervousness.

The impact on inflation on account of oil prices remains to be seen. By raking up the reverse repo rate by 25 basis points, the Governor has effectively signaled to the market that interest rates are moving upwards as also is inflation but not in an unrestrained manner.

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K V Kamath
CEO & MD
ICICI Bank

The Reserve Bank of India has, through the annual policy statement, recognised the momentum in the Indian economy with strong fundamentals driving growth and the need to maintain a supportive liquidity environment.

This is balanced with the key consideration of managing inflationary expectations given the continuing uncertainty in the energy price situation.

The increase in the reverse repos rate needs to be seen as a proactive move in this context.

The decision to review monetary policy on a quarterly basis is welcome as it envisages a more proactive and dynamic approach in the evolving situation.

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Jaspal Bindra
GM, South Asia
StanChart Bank

The Reserve Bank of India (RBI) has sent out a strong signal in favour of price stability and growth.

The RBI's increased optimism on domestic growth and reviving investments ensures commitment to aligning monetary policy with the broader objectives of growth and stability.

Indications that the growth momentum is extremely strong and credit growth has been the fastest in 55 years is heartening and alludes to the strength and resilience of the underlying domestic economy.

Further, we draw comfort from the fact that an investment revival is underway in India and that will support growth on a sustained basis in the medium term.

The policy has also made a distinction between monetary policy and developmental policies. These will provide a framework for the monetary, structural, and prudential measures in response to requirements of growth and development.

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Sanjay Nayar
CEO
Citigroup India

The hike of 25 bps in the reverse repo rate is a measured response by the Reserve Bank of India (RBI). The hike has given a clear signal that the RBI will balance the needs of economic growth with the requirements of price stability.

In this regard it is a continuation of the October 2004 policy. The quarterly review is also an important development to fine-tune the RBI's response to changes in the domestic and global environment that could impact growth and inflation in India.

RBI's continuing thrust on institutional soundness of the market through appropriate use of technology, operational changes, strengthening of PDs etc. are important steps for the development of the bond market.

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Sumant Sinha
President-Finance
Aditya Birla Group

The story in the Reserve Bank of India's (RBI) annual policy statement is the move in the reverse repo rate by 25 bps to 5.0 per cent.

The RBI appears quite sanguine on growth. GDP is expected to grow by 7 per cent this year, which will make India one of the top performing economies of the world.

The emphasis appears to be on creating conditions that will allow this rate of growth to become more sustainable.

High inflationary expectations are clearly a negative and therefore the RBI has chosen to dampen inflationary expectations at this stage, particularly given the spike in oil and commodity prices. The increase in rates will certainly impact the cost of borrowing.

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Y M Deosthalee
CFO
Larsen & Toubro

The Reserve Bank of India's (RBI) annual policy statement has given a clear indication of a turn in the interest rate cycle.

Recognising the fact that supply factors, particularly oil prices will continue to dominate the price situation, the policy has also sounded caution on liquidity overhang in the system.

The policy is a calibrated response in trying to maintain the growth momentum in the economy in a situation of appropriate liquidity while at the same time reigning in inflationary expectations.

At the broad level this has been achieved by keeping the bank rate and cash reserve ratio unchanged and increasing the reverse repo rate. 

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R Ravimohan
CEO
Crisil

The extant circumstances require status quo to be maintained and the monetary policy to be placed on a state of alert to deal with inflation. The current policy has done precisely that.

It allows growth momentum to continue and will give comfort to those that seek to invest into new assets. Lack of signals to harden interest rates is a huge message in itself.

Yet, the RBI is cautious about inflationary pressures and is clear that it will harden its stance should inflationary expectations rise.

The other important signal is there no possibility of it going down, as the twin forces of credit pick up and inflationary pressure outweighs the comfort provided by adequate liquidity levels.

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H N Sinor
Chief Executive
IBA

The measures of the policy in a wider canvass were aimed to integrate and deepen the various segments of the financial market and also to enhance the transparency and soundness of the financial system in the country.

By nudging the reverse repo rate up, a subtle signal is given on the direction of the interest rates and the precautionary steps to be taken by the players.

Measures such as specific time frame for the withdrawal of NBFC from the call money market, linking the exposure to call money market with capital funds of commercial banks, participation of urban co-operative banks in the market repo with adequate checks and balances are going to boost the sentiment.

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Niall Booker
CEO
HSBC India

On the surface of it, the annual policy appears to be in line with the central banker's maxim that as far as possible , prices should be kept as steady. It is no bad thing and if worn , should be worn as a badge of honour.

The central Bank is attempting a delicate balancing act between targetting price stability and providing enough liquidity to meet the demand of the private and the public sector.

For the latter the demand was two and a half times last year. This does create the real possibility of crowding out and for this liquidity would have to be properly managed.

Although the Reserve Bank of India says it is doing a balancing act, the repos rate hike indicates that its focus is more on price stability.