Rana Kapoor: Soothing statement

RBI ANNUAL POLICY 2004-05/ GUEST COLUMNS

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Rana Kapoor
Managing Director & CEO
Yes Bank

The Indian economy has grown at over 8 per cent last fiscal and is expected to sustain a 7per cent GDP growth in the near term. This is against the backdrop of 5per cent inflation and low levels of interest rates.

The bank rate is at 6per cent, repo rate is 4.50 per cent, and the entire gilt curve with maturities between a year and 30 years is trading well below 6 per cent.

While the RBI has maintained all the key interest rate indicators at the pre-policy levels, it has removed the soft rate bias from the monetary policy "stance". This is particularly positive considering the following:

The momentum of demand-led growth in the economy is likely to push prices higher. Globally price pressures are reflecting on most products, particularly commodities and India is substantially exposed to oil price risk

The US economy has begun to see a reversal of soft interest rate expectations, with sharp upward rebound in term interest rates.

RBI has done well to leave interest rates unchanged. After all, not every credit policy statement has to necessarily result in an immediate monetary action.

The policy stance of providing adequate liquidity to meet credit growth and support investment demand continues to remain relevant. Given the incessant foreign currency flows, abundant rupee liquidity is being generated continually.

Besides, the government borrowing programme is unlikely to put pressure on interest rates. For over 18 months, rates implied by FX markets have prevailed at levels much lower than the local money market rates, creating an arbitrage opportunity.

There was an expectation that RBI would probably take measures to bridge this gap and reduce, if not eliminate this disparity.

To provide impetus to credit off take, the RBI has created incentives to channelise credit to economically critical sectors like infrastructure, agriculture and SME.

Inclusion of loans for storage facilities under priority sector lending and of agro processing and preservation & supply infrastructure under infrastructure lending will give the desired boost to development of necessary agri-infrastructure to modernize Indian agriculture.