Financial stability the top priority
MONETARY POLICY 2006-07
| And so, by hiking the provisioning requirements for standard assets in commercial real estate, capital markets and personal loans, the RBI has conveyed a distinct message on credit pricing and asset quality in market segments which have witnessed abnormal growth, and therefore warrant proactive corrective measures by the banking system. |
| This time around, the Policy has come against the backdrop of mixed trends. While inflation remains at a benign 3.5 per cent, economic growth remains buoyant, along with money supply and credit growth. The banking system is once again experiencing adequate liquidity. |
| The case for keeping rates on hold can be justified on the basis of not adversely impacting the excellent business momentum currently underway. |
| The central bank can afford to adopt a 'wait-and-watch' approach given the fact that it has managed to rein in inflationary expectations extremely well. With headline inflation remaining well-below RBI estimates (with the core measure at a mere 0.97 per cent!), the RBI had enough headroom for deferring a reverse repo rate hike. |
| A 'hold' on interest rates also provides a much needed breather to the banking industry, which has just emerged out of a liquidity crunch. |
| Moreover, with the FRBM kicking in this fiscal year, and considering the Government's higher Borrowing Program, aimed at facilitating growth, the RBI has provided a conducive environment to maintain the growth trajectory. |
| Nonetheless, the interest rate tightening cycle is yet to peak as domestic and global macroeconomic trends suggest. Applying numbers to illustrate our point, GDP growth has topped RBI projections (8.1 per cent estimated for FY06), M3 growth has overshot the target of 14.5 per cent y-o-y (20.4 per cent y-o-y) while credit growth has advanced 36 per cent y-o-y vis-à-vis the target of 19.5 per cent y-o-y. As mentioned earlier, WPI inflation has undershot estimates of 5-5.5 per cent as a result of incomplete pass-through of a rise in crude oil prices. |
| Rana Kapoor, Managing Director & CEO, Yes Bank |