P K Choudhury
Managing Director
Icra Ltd
The Reserve Bank of India’s annual policy statement lends credence to the view that economic growth is likely to continue during the current fiscal.
Supporting the prognosis, among other factors, are the overall good results posted by the corporate sector for 2004-05 and the buoyant growth in non-food credit during the year.
However, on the downside, the yield curve has moved upwards following the hardening of yields across the maturity spectrum. Thus, the spread between 1- and 10-year yields increased from 61 basis points as at end-March 2004 to over 100 basis points by end-March 2005.
However, the RBI has pushed up the fixed repo rate to 5 per cent from the 4.75 per cent, while raising the M3 growth rate target from 14 per cent to 14.5 per cent for 2005-06 (12.8 per cent in 2004-05).
The growth rate for real gross domestic product has been placed at 7 per cent for 2005-06 (6.9 per cent in 2004-05), in line with an assumed inflation rate of 5-5.5 per cent (5 per cent in 2004-05).
In fact, the RBI has acknowledged that the increase in the projected inflation rate is a signal to the market that the current fundamentals of inflation — global crude oil prices and interest rate dynamics — may not be that favourable.
As far as deposit mobilisation and credit growth are concerned, the RBI has projected increases of 15 per cent (14.1 per cent in 2004-05) and 19 per cent (26 per cent in 2004-05) respectively, during 2005-06.
Interestingly, the growth rate for bank deposits during 2004-05 had marked a sharp decline from 2003-04 (17.5 per cent) possibly because of the substitution of time deposits in favour of postal deposits.
The increase in the fixed repo rate may provide an opportunity to banks to push up rates.
The CP has proposed measures to enable NGOs engaged in micro-finance access External Commercial Borrowings of up to US$5 million during a financial year for permitted end-uses, and reviewing all existing guidelines on the financing needs of the small-scale sector.
The proposed move to continue with the restructuring of regional rural banks is also likely to facilitate credit flow to the rural sector. | 
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