A transparent and credible policy: SS Mundra

The major facet of Tuesday's monetary policy is its transparency, as it has fulfilled the market expectations of an upward adjustment in the repo rate by 25 basis points (bps), accompanied with downward adjustment in the marginal standing facility (MSF) rate by 25 bps. As the Reserve Bank of India (RBI) has been effectively preparing market participants through its forward guidance, the possibility of any knee-jerk reaction has come down significantly.

This certainly augurs well for the financial markets' stability. Additional liquidity support through the term repo is highly positive in the current phase, as banks have started facing some strains on liquidity on the back of a seasonal uptick in credit demand. The completion of the process of re-alignment of interest rate corridor to normal monetary policy operations reflects the central bank's confidence in managing external sector risks.

The realistic assessment of future growth and inflation trajectories by focusing on retail rather than the wholesale price index-related inflation would significantly contribute to the overall credibility of the monetary policy.

Despite continued weaknesses in economic activity and inflationary pressures, RBI has not diluted its thrust on developmental and regulatory aspects. Its policy review indeed discusses issues such as strengthening the monetary policy framework, financial inclusion, dealing with corporate and institutional distress and broadening and deepening the financial markets.

The governor's statement clearly underscores the importance RBI attaches to its consultative process. In response to banks' concerns about the difficulty of settling electronic funds transfers after market closing, RBI has revised the timing of MSF operations so that there will be better management of reserves and liquidity.

RBI has also announced some important structural reform measures such as promise to float Inflation-indexed National Savings Securities linked to consumer price index for retail investors in November/December and release of guidelines on Cash-settled Interest Rate Futures around mid-November with an aim to launching the product in December. This underscores RBI's continued thrust on financial markets development.

SS Mundra
Chairman & Managing Director, Bank of Baroda