Too early to celebrate

The Reserve Bank of India has put the rate hike on hold for the time being but can tighten the policy any moment.

At Reserve Bank of India Governor Yaga Venugopal Reddy's annual meeting of bankers on Tuesday, one bank CEO asked him whether he was "indirectly" guiding banks where to allocate their resources.

His obvious reference was the RBI clampdown on personal loans, high- value home loans, venture capital financing and commercial real estate loans by raising the requirement of general provisioning on standard assets as well as risk weight.

The twin measures will make these loans costlier for consumers as banks would need to make higher provisions and allocate more capital for some of these loans. Reddy did not outright deny the CEO's "allegation."

Encouraged by the governor's silence, the banker asked Reddy for data which could substantiate the regulator's apprehensions that banks had been over-exposed to these sectors and were not taking adequate measures to mitigate the inherent risks. This time, Reddy countered him by asking for data from banks on the pricing of their loans!

In January this year, at the third quarter review of the last policy, Reddy hiked the repo and reverse repo rates and emphasised the need to ensure the quality of credit and flow of credit into certain segments.

The hike in key policy rates as well as a temporary liquidity crunch on account of the over Rs 30,000 India Millennium Deposit redemption did not dampen banks' appetite for real estate and personal loans.

No wonder that Reddy has chosen to attack these segments directly even as he has spared the key rates for the time being. Some of the banks now would have to put a brake on the unbridled credit growth.

The underlying theme of the policy document is the RBI's increasing awareness of the risks for the financial system even as the overall stance continues to remain growth and stability. The RBI has recognised that there are risks to both growth and stability from domestic as well as global factors.

"In a situation of generalised tightening of monetary policy, India cannot afford to stay out of step. It is necessary, therefore, to keep in view the dominance of domestic factors as in the past but to assign more weight to global factors than before while formulating the policy stance," the document says.

It has gone even one step ahead and made no bones about the fact that the central bank would be ready "to act in a timely and prompt manner on any signs of evolving circumstances impinging on inflation expectations."

The message is loud and clear. It is too early to celebrate. The RBI has put the rate hike on hold for the time being but it can tighten the policy any moment. If the situation demands, it may not even wait till the quarterly review of the policy in July.