Policy addresses concerns of slowing growth

Comment: R Ravimohan

R Ravimohan,
Managing Director & Region Head, Standard & Poor’s South & South-East Asia

We hope that the limit for senior citizens is further enhanced in the years to come.

The annual monetary and credit policy announcement did, of course, address the basic macroeconomic concern of slowing growth. The Reserve Bank of India (RBI) came out with a realistic assessment of India’s growth prospects for 2009-10, pegging it at 6 per cent. Our own current view is that it will be in the range of 5.5-6 per cent.

With wholesale price inflation near zero and likely to be negative in the coming weeks, the stage was set for further stimulus. This, the RBI did by lowering the repo and reverse repo rates by 25 basis points. However, with the quantum of liquidity in the system, banks are hardly using the repo window.

It is more important to stop them using reverse repo to park excess funds and that is being addressed by the lowering of that rate. Of course, the RBI has repeatedly expressed concerns about banks not lending enough through corporate and retail channels.

Banks, on the other hand, are the final arbiter for lending decisions and their risk-averseness to lend in the face of the domestic economic slowdown and global financial problems cannot also be faulted. Finding the right balance between increasing lending and preserving asset quality is the challenge now.

Short-term considerations aside, the annual announcement typically focuses on longer-term regulatory and structural issues. Similarly, there are significant references to advancing the cause of financial inclusion, which recent committees chaired by C Rangarajan and Prof Raghuram Rajan, for example, have emphasised as a critical priority for the financial sector. Bringing recommendations from these groups to the centre stage in this policy announcement is a welcome development.

One important measure is the proposal to re-structure the BPLR mechanism. Overall, the policy statement has done well to pay so much attention to these and other long-term issues.