|
| A fine balancing act |
| BS Reporter / Apr 23, 2010, 03:52 IST |
|
The Reserve Bank of India’s (RBI’s) “25-25-25” approach in the monetary policy reflects its stance of moving in a calibrated manner in the direction of normalising the policy rate instruments and focusing on containing inflationary pressures. The policy’s stance is balanced between the twin objectives of anchoring inflation expectations and active liquidity management. RBI, in its own words, needs to manage “a fine balancing act and ensure that while absorbing excess liquidity, the government borrowing programme is not hampered”. Assuming a normal monsoon, the country is set to grow at a moderately accelerated pace in 2010-11 of over 8 per cent with balanced growth contribution from all three sectors — industry, services and agriculture. In order to achieve this, RBI’s monetary management will need to balance the resource demand to meet credit offtake by the private sector and government borrowings. RBI has also included this objective in its policy stance. Given the signs of return of pricing power to the manufacturing sector and increasing capital expenditure, bank credit growth will likely be over 22 per cent by March 2011 against RBI’s projection of 20 per cent.
We expect RBI to pursue an active liquidity management policy during the current financial year. While monetary policy considerations demand surplus liquidity should be absorbed, smooth sailing of the government borrowing programme (36 per cent higher y-o-y in FY11) warrants supportive liquidity conditions. Further, since it appears unlikely that the large monetary expansion in advanced economies will be unwound in the near future, excessive capital flows call for prudent policies to counter sharp and volatile exchange rate movements.
Given this, we do not expect a significant appreciation of the rupee in the near future. RBI’s intent to put out a discussion paper on the proposed licensing of new banks within the next three months, and that on further liberalisation of foreign banks’ presence by September, are positive signs. These measures, coupled with proposed discussions on regulations on bank and financial holding companies, are set to define the next round of financial reforms. Impetus provided to infrastructure financing is in line with the focus on infrastructure sector growth by both fiscal and monetary authorities.
The gradual reversion of monetary expansion is a short-term positive for equity markets. The bond market yields will, however, continue to remain under pressure, given the large government borrowing programme. Overall, the balanced approach of the monetary policy is welcome and an enabler to the economy’s growth.
Ajay Srinivasan, CEO (Financial Services), Aditya Birla Group
|
|
|
|
|
|
|
|
|
|
 Read Business news in |  |
|
|
|
|
|
|
Advertisements |
|
|
|
|
|
|
|
|
|
|
Content Guide
