Maintaining the policy tempo

ANNUAL POLICY 2005-06/ GUEST WRITERS

M Venugopal
CMD
Bank of India

The corporate sector was looking at interest rates remaining stable for sustaining the growth momentum.

There were, however, concerns on inflation, both from internal growth as well as external factors.

In the backdrop of strong credit growth of 26 per cent in 2004-05 and expected growth of 19 per cent in 2005-06, coupled with planned increased government borrowing programme of Rs 1,65,000 crore, the governor has maintained the broad policy stance of the previous year, provision of appropriate liquidity and price stability.

The few changes in quantitative parameters is perhaps a measured acknowledgement that the policy stance has been successful in the pursuit of laid down objectives and needs to be continued.

The increase in the reverse repo rate by 25 bps alongwith the statement that interest rate cycle has turned since the low of FY04, is a gentle signal to the market as also in line with the Reserve Bank of India's (RBI) concern on inflation control.

The repo rate i.e., for provision of liquidity to the market has interestingly been kept constant at 6 per cent.

All other rates have been left unchanged which is the right step, as the various segments of the economy have been doing well.

The few regulated rates in the banking sector, viz., Savings Bank, non-resident Indians etc, have rightly been left as such, which is good for the banking sector at the present juncture of its development and maturity.

Reduction in the minimum period of CDs from 15 to seven days is also a welcome move which will deepen the market, and provide avenue for augmentation of liquidity for the banking sector.

The policy also lays down a number of measures for improving credit delivery to select sectors, strengthening the banking system and improving the overall efficiency of the financial sector.

Importance of lending to agriculture and SSI has been reemphasised.

Increase in produce marketing loan to farmers to Rs 10 lakh under priority sector, and increased role of CIBIL and emphasis on co-ordination with SIDBI including cluster approach for financing to small-scale industries, reflect the right stance for effective credit delivery to these important segments.

The RBI has rightly placed emphasis on protecting interests of depositors, including by following an inclusive policy and improvement in customer service which has been a constant concern, to ensure good quality banking services to the vast populace.

The move to set up an independent Banking Codes and Standards Board on the UK model is an important proposal.