Comment: Naresh Takkar

Naresh Takkar
Managing Director, ICRA

In its monetary policy statement for 2011-12, the Reserve Bank of India (RBI) raised the repo rate by 50 basis points, a break from the trend of 25-basis point increases since March 2010, owing to the generalisation of inflationary pressures. The repo rate was also designated as the single independent varying policy rate, which would enhance the effectiveness of communicating RBI’s monetary stance.

RBI remains focused on strengthening the banking sector and deepening financial markets, as reflected in its policy announcements, which include a rise in the provisioning rate and plans to implement the reform measures under the Basel III framework. If the savings bank rate were to be changed more often or even deregulated, it would aid a better transmission of policy rates. However, this would increase interest rate sensitivity for banks. With RBI accepting the broad framework of the Malegam committee recommendations, the final guidelines for non-banking financial companies-micro finance institutions may lead to resumption of funding to such non-banking financial companies. RBI is expected to come out with several guidelines, including a few on new bank licences, holding company structures for banks and other financial intermediaries and priority sector funding. These, if implemented, hold the scope to change the competitive landscape of Indian financial markets.

The baseline growth projection of 8 per cent for 2011-12 and the indicated inflation trajectory are in line with Icra’s expectations. With RBI strongly enunciating views that containing inflation is imperative, not only to anchor inflationary expectations, but also to sustain growth over the medium-term, Icra expects RBI to persist with monetary tightening and raise policy rates by 25-50 basis points in the coming months.