Controlled aggression

MONETARY POLICY 2006-07

Reserve Bank's Annual Credit Policy for 2006-07 projects the image of a regulator that perhaps had intentions of raising key interest rates but - for compulsions of its own - finally decided not to do so.

However, the regulator's desire to tighten and control the flow of bank credit comes through strongly in all the other non-interest rate measures that it has announced in its Policy.

Reserve Bank's concern is centered in particular around four areas of bank credit - capital market exposure, "non-priority" home loans, commercial real estate loans, and personal loans.

The last of these has largely been a surrogate means for individuals in recent months to raise money for investment in the capital markets or in real estate.

Thus, although key interest rates have remained unchanged for now, they appear to be straining at the leash, ready to be released by Reserve Bank at the slightest hint that its non-interest rate measures have not yielded the expected results.

Apart from raising provisioning norms for standard assets in the four areas mentioned above, and in selectively increasing risk weightage on loans to these "sensitive" sectors, RBI has also projected non-food bank credit growth at only 20 per cent for the year, as against the actual growth rate of around 31 per cent recorded last year.

It has also raised the interest spread for export credit in foreign currency, in order to reduce arbitrage possibilities between domestic and foreign interest rates.

The signals are therefore clear - that RBI wishes to keep credit growth in check, particularly to those sectors it sees as "sensitive".

While controlling rampant credit growth, Reserve Bank has also taken care to see that the Indian Rupee is kept steady, by announcing measures that will lead to the inflow of funds from overseas through NRI deposits (by raising NRE deposit interest rates) and through controlled FII inflows (by resisting the temptation to increase the risk weightage on banks' capital market exposure in general, even though standard provisioning norms have been raised).

Recognising the need for banks to raise additional capital to meet Basel II requirements , the regulator has allowed the issue of preference capital.

This fulfils three objectives like an additional route to capital raising, RBI's concerns of ownership and control, and attracting a new class of investors interested in sharing the benefits of growth.

Bhaskar Ghose, Managing Director, IndusInd Bank