Credit Policy Review : Issues & Insights

A cross-section of bankers, marketmen outline their expectations from the policy.

Apex bank to face a tough balancing act

A K Purwar,
Chairman,
State Bank of India

The RBI has a tough balancing act before it in the upcoming mid-term review of the annual policy statement for 2004-05. It's very difficult to say whether RBI will touch interest rates. I will not comment on interest rates, let's wait for Tuesday.

The apex bank's job is particularly tricky because there is tremendous growth in the economy and robust growth in non-food credit numbers. SBI's advances have grown by 24 per cent on a year-on-year basis. This is a historic high.

The undertone in the economy is very strong but at the same time inflation has touched a very high level. There is more than enough liquidity in the system. I'm comfortable with the liquidity.

Depositors want positive returns

K Cherian Varghese,
Chairman & MD,
Corporation Bank

RBI will pitch in for stability rather any change on interest rates. For new projects to come, interest rates should stay benign. It is not that 25 basis points will kill growth but it affects sentiment.

Only one thing that can be argued against stable interest rates is the rising inflation rate. Owing to this, there is a strong demand from depositors for positive returns. The RBI needs to balance out the needs of depositors and that of borrowers.

A direction is needed given that interest rates have been highly volatile and uncertain in recent months. We want some clarity on the usage of the investment fluctuation reserve (IFR) for provisioning of depreciation of government securities.

The industry has made a representation that provisioning be permitted from shareholders' equity. We hope that is permitted by the central bank. We can also expect the Reserve Bank of India to put more emphasis on customer service as they have been doing in previous policies.

A possible increase in CRR

V P Shetty,
Chairman & MD,
Uco Bank

There could be an increase in the cash reserve ratio (CRR) by 25 basis points. This would suck out another Rs 4,000 crore from the system. But I do not see any change in the repo rate in view of the excess liquidity which is likely to prevail for sometime.

The liquidity will remain surplus given the continuing inflows of dollars. The bank rate is also not likely to change owing to the same reasons.

Of course, there is the concern of inflation that is worrying both the central bank and the government. I expect inflation estimate to be revised upwards to 6.5-7.0 per cent from the present, 5.5-6.0 per cent in view of the rising oil prices.

The GDP growth is also likely to be revised downwards, albeit small. The GDP growth estimate is likely to range between 6.5 per cent and 7.0 per cent from the earlier over 7.0 per cent.

Norms to use IFR to offset loss expected

Romesh Sobti,
Executive V-P and country
representative, ABN Amro

I do not see any change in monetary variables such as the CRR. This is because we have seen significant tightening in the liquidity. There is a strong caveat for the RBI to contain inflationary pressure and therefore assert a tightening stance.

There may be an upward bias on rates, though this will not necessarily result in a hike in the bank rate. There is a 70:30 chance of rates rising by the year end.

However, I do see the 10-year paper yield in 6.75-7 per cent range by the fiscal-end. There is some speculation on the RBI allowing the utilisation of IFR to offset some losses banks have been exposed to on account of the changes in interest rate. The RBI may come out with norms to permit those funds.

Time to allow full play of derivatives

G V Nageswara Rao
Managing director,
IDBI Bank

I do not expect an immediate repo rate hike because the inflation run is largely supply-side driven by oil and commodity prices and demand management is likely to be less effective.

There is no proven evidence in Indian experience that negative real rates of interest adversely affect savings, investment or economic growth.

There is adequate liquidity if one counts hidden sources such as the MSS and CRR. The up-cycle seen thus far in global interest rates is more a correction of differential between India and rest of the world that was leading to arbitrage.

Differential between Indian and global rates at the long-end has widened. To correct the same, RBI needs to allow full play of derivatives and develop markets for long-term interest rate and foreign exchange benchmarks.

One would keenly watch governor's statement on some key elements of unfinished reform agenda for development of risk products: short-selling of bonds, interest rate options and credit derivatives.

At best a 25 bps hike in repo rate

Shailendra Bhandari
Managing director,
Centurion Bank

With inflation running close to 8 per cent, the credit policy will not be an easy one. We are likely to see some or all the following change: A change from the present stance for sift and flexible interest rate environment to a more neutral stance, or even with a bias towards tightening.

Given the below normal monsoon a possible downward revision in the GDP outlook from 6.5 per cent to 7 per cent to around six per cent.

A possible upward revision in inflation target from the current 5 per cent. What we do not expect this time is an immediate change in the interest rate, or any immediate additional change in the CRR.

Certainly the bank rate, which as become largely symbolic, is unlikely to be changed from the current 6 per cent. At best, we may just see a 25 basis point increase in repo rate from 4.5 per cent to 4.75 per cent.

There is no justification for a rate hike now

Anand Rathi,
Chairman,
Anand Rathi Securities

The bond market has priced in a 50 basis point rate hike. This is evident from the fact that the spread between one year and repo rate, which used to be 25 bps average for the last three years, has now gone up to 100 bps.

This indicated that the market has priced in at least 50 basis point hike along with volatility of 25-30 bps. The postponement of last auction and the execution of a 10-year auction at 6.99 per cent is an indicator that the RBI is open to a rate hike.

The rate hike is justified only if there is substantial growth leading to an inflationary pressure. However, the current scenario indicates that growth is not in an inflationary pressure.

This is despite the fact that WPI is on the higher side mostly on account either supply side pressure or imported inflation as indicated by commodity price hike.