Rate policy remains unchanged

RBI ANNUAL POLICY 2004-05/ GUEST COLUMNS

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Hemang Raja
MD & CEO
IL&FS Investsmart Ltd

The Monetary and Credit Policy 2004-05 holds few surprises. It strikes a positive note on several key features such as the gross domestic product (GDP) growth, inflation and interest rates, and gives us the impression that the central bank is indeed on the top of things.

It has projected a GDP growth of 6.5-7 per cent for 2004-05. This is a strong endorsement of the underlying growth momentum in the Indian economy. In line with general expectations, RBI's monetary stance remains unchanged. It has continued to back its interest rate policy to provide adequate liquidity to meet credit growth and investment demand.

The inflation is expected to remain at around five per cent in 2004-05 as against an average of 5.4 per cent in 2003-04. Despite the overhang problem of oil prices and large domestic liquidity, any price increase is unlikely to cause concern on the micro stability.

The RBI has lowered the margin requirements by banks for share financing from 50 per cent to 40 per cent and the minimum cash requirement to 20 per cent therein.

From the capital market's perspective, the apex bank has reposed its faith in the systematic growth of capital markets in the country.

Infrastructure financing has also been accorded priority by widening its scope and allowing banks to raise long-term finance. The corporate sector will benefit from the relaxation of external commercial borrowings (ECB) (ECB limit raised to $500 million) and overseas investment limits (up to 100 per cent of net worth).

The central bank has continued to lay stress on improving the asset quality of banks by directing them to make higher provisioning against substandard advances and higher graded provisioning against assets doubtful for over three years.