Sanjay Bhasin,
CEO
JM Morgan Stanley Fixed Income
Governor Reddy has carried on the mantle of making the credit policy a non-event. Given that the markets react only if there is a major rate announcement, they remained muted. The key rates were left untouched, and with due reason.
The bank rate which is the key reference rate for the financial markets, could not be cut since all indicators point to a bottoming out of rates with global interest rates all set to rise.
The bank rate could not be raised since the country is awash with liquidity, it would encourage arbitrage and impact investment growth adversely.
The repo rate could not be cut since it would cause the entire yield curve to move down, leading to a high degree of pain once rates reverse. The rate could not be raised since it makes scant sense to pay a higher rate for the huge amounts that the central bank is borrowing daily.
The CRR could not have been cut since it would add the woes of plenty in terms of liquidity. The CRR could not have been hiked since it goes the stated policy of cutting it down to 3%.
Possibly a more mature market would have warranted a lower repo rate and a short term CRR hike. But in times of extreme volatility in the Indian markets and turbulence globally, a status quo may serve the markets best.
The policy has recognised that there are a number of insidious factors involved in an interplay on a global scale. Issues of growth and interest rates, coupled with ascending oil prices are likely to impact our markets in terms of liquidity and consequently interest rates.
The consistent soft bias that we have seen in the previous policies has been eliminated. It can now officially be termed as a neutral bias. Fear of 'higher than before' inflation has surely contributed to this.
The policy also lays out a smorgasbord of options before the central bank for managing the plethora for foreign exchange inflows.
A small fillip has been given to securitisation, in that investment in securitised assets backed by agricultural lending will construe as priority sector lending. Recognition of NPAs within 'doubtful assets' has been tightened.
A number of measures have also been announced to improve the credit delivery mechanism.
The reduction in the participation of non-bank entities from the call money market continues.
Interest rates on CRR balances are likely to fall. Banks being allowed to raise long term funds may aid infrastructure financing and will certainly improve their Asset Liability mismatches.
Banks will do well to heed the sustained cautionary comments on interest rate risk by the central bank. A healthy Investment Fluctuation Reserve will hold banks in good stead.
Similarly, corporates need heed the central bank's comments on excessively large unhedged foreign exchange positions.
